The Canada Revenue Agency (CRA) released changes last week to the administrative policy relating to GST/HST wash transactions.
The change allows for additional interest relief in relation to wash transactions disclosed by GST/HST registrants through the Voluntary Disclosures Program (VDP). This change applies to any reporting period where net tax is due after March 31, 2007.
A wash transaction occurs when a taxable supply (other than zero rated) is made and the supplier incorrectly charges a lesser amount to a purchaser who would have been entitled to claim the tax paid as an input tax credit. Since the tax remitted by the supplier would have been equal to the tax refunded as an ITC to the purchaser, there is no net tax remaining in the government coffers; therefore the transactions ‘wash’.
Effective April 1, 2007 the 6% penalty on wash transactions was replace by an interest charge of the basic rate plus 4%. This created an administrative issue since the Voluntary Disclosure program was only accessible in cases where there is a penalty. The policy has been changed to allow the interest to be reduced to zero for wash transactions where a voluntary disclosure has been made.
Examples of wash transactions can be found in the CRA release Chapter 16.3.1 Reduction of Penalty and Interest in Wash Transaction Situations
Information on the Voluntary Disclosure program can be found through your RLB tax advisor and www.cra.gc.ca/voluntarydisclosures
