Anonymised, illustrative composite. The buyer’s first read priced $340,000 of disallowed credits and was about to retrade the deal on it. The regulation the exposure actually turns on cut the number to $61,400.
At a glance
A buyer backed by a family office agreed to acquire the shares of an Ontario electrical subcontractor for $8,200,000. About a third of its labour was subcontracted to nine small trades, most of them one- and two-person operations invoicing monthly.
Indirect tax diligence looked easy. Every GST/HST return had been filed on time, the refunds had been received, there were no arrears and no assessments outstanding. There was nothing to find in the filing history, which is why the buyer’s accountants went to the invoices.
They sampled 300 purchase invoices from 4,180 across four years. Eighty-four of them — 28% — showed GST/HST as a line item and carried no registration number for the supplier anywhere on the face of the document.
This is not an unfiled return or an unpaid balance. The returns were filed and the money received. The risk is that on audit the credits are denied for want of prescribed information and the refunds already banked come back with interest — a perfect supplier relationship does not help, because the condition is documentary.
The buyer’s first calculation extrapolated 28% across $2,100,000 of credits claimed and produced an exposure of about $588,000, which it discounted to $340,000 for sampling error and prepared to take to the vendor as a price reduction. That number was wrong, and the reason it was wrong is in the regulation rather than the Act.
Four years, $2,100,000 of input tax credits claimed, 4,180 purchase invoices, 300 sampled, 84 defective on their face.
Re-sorted against the regulation’s thresholds, the 84 broke down as: 31 invoices below $100, for which no supplier registration number is prescribed at all; 40 invoices between $100 and $500, all of which were issued under written subcontract agreements that did carry the registration number; and 13 invoices of $500 or more that carried neither a registration number nor the additional information the top tier requires, and for which no other document supplied it.
Thirteen of 300 is 4.3%, not 28%. Extrapolated across the population that is roughly $90,300 of gross credit exposure, and of that, $28,900 was cured by locating the recipient details and terms of payment in the subcontract files, leaving $61,400 genuinely unsupported before interest.
The condition is in Excise Tax Act s.169(4), and it has a timing element people miss. “A registrant may not claim an input tax credit for a reporting period unless, before filing the return in which the credit is claimed” the registrant “has obtained sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined, including any such information as may be prescribed”. The evidence must have been obtained before the return went in. Assembling it after an auditor asks is not the same act.
The prescribed information is in the Input Tax Credit Information (GST/HST) Regulations, and s.3 tiers it three ways by the total amount shown on the supporting documentation:
Below $100, the regulation prescribes the supplier’s name, the invoice date or the date tax became payable, and the total — and no registration number. Where the total is “$100 or more and less than $500”, the prescribed information includes “the name of the supplier or the intermediary in respect of the supply, or the name under which the supplier or the intermediary does business, and the registration number assigned under section 241 of the Act to the supplier or the intermediary, as the case may be”. At $500 or more the regulation adds the recipient’s name, the terms of payment and a description of each supply sufficient to identify it.
The second point is the definition. Supporting documentation in s.2 of the regulations is not the invoice. It expressly includes a receipt, a credit-card receipt, a debit note, “a book or ledger of account”, a written contract or agreement, a record held electronically, and “any other document validly issued or signed by a registrant in respect of a supply made by the registrant in respect of which there is tax paid or payable”. Prescribed information may therefore be spread across documents. A registration number sitting in a signed subcontract satisfies the requirement for invoices issued under that subcontract; it does not have to be reprinted on each one.
There is also a relief valve, and it is worth knowing it exists so that nobody plans around it. Section 169(5) allows the Minister to exempt a registrant from the s.169(4) requirements “Where the Minister is satisfied that there are or will be sufficient records available to establish the particulars of any supply”. It is discretionary, it is granted in advance, and it is not a diligence answer.
No price change. A $75,000 escrow ran for twenty-four months against the indirect-tax position — the $61,400 unsupported figure plus interest and a sampling margin — and was released in full at expiry.
The post-closing fix mattered more than the escrow: registration numbers collected from the nine active subcontractors, recorded against the vendor master file, and an accounts-payable rule that blocks posting an invoice over $100 without one. Two days of a controller’s time closed the exposure prospectively.
The vendor, who had been braced for a $340,000 retrade, agreed to the escrow in an afternoon.
Two ways, in opposite directions, and the second is the expensive one.
Had the buyer taken $340,000 to the vendor, the vendor’s advisers would have applied the same tiers, produced the same $61,400, and the buyer would have spent its credibility on a number it could not defend — on a deal where the vendor had two other approaches in the file.
Had the buyer instead accepted the clean filing history and never sampled the invoices, it would have inherited a live audit exposure on four years of credits with no escrow behind it and no representation specific enough to claim under — because a representation that all returns have been filed and all tax paid is perfectly true here. Section 169(4) is not about payment. It is about proof.
An invoice that shows GST/HST as a separate line and no registration number is a self-declaring problem — but only above $100, which is why the sample has to be sorted by amount before it is counted.
The second tell is structural: one- and two-person trades invoice from templates, and a template that omits the registration number omits it on every invoice for years — which turns a documentary defect into a population rather than an exception. On an asset purchase the analysis moves entirely: the s.167 election governs whether tax arises on the sale at all, which is a separate question from whether historical credits were supported — see the GST/HST election on an asset sale.
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