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Tax Obligations and the Construction Industry

Written by Laurence V. Dandurand and Julie Gaudreault-Martel

Tax requirements for the construction industry are the same as for any entity operating a business in Québec. However, over the years, tax authorities have identified certain issues that are more specific to the construction industry, such as:

  • False invoicing;
  • Illegal employment;
  • Personal expenses charged to the company;
  • The use of company property for personal purposes.

Like all taxpayers, companies are subject to two types of government action when it comes to taxation: civil audits and penal and criminal investigations.

Tax Audits: Objections Raised by Tax Authorities

Tax audits, provided for in Division VI (Audits, Investigations and Inquiries) of the Tax Administration Act,[1] are designed to detect the above-mentioned problems and are conducted by an auditor representing one of the two tax authorities (provincial or federal).

Tax authorities have several means of verification at their disposal—regular visits, prevention activities, unannounced visits, requests for specific documents or interviews, or simply requests for information from government partners such as the Régie du bâtiment du Québec (RBQ), the Autorité des marchés publics (AMP), the Commission de la construction du Québec (CCQ), or the Commission des normes, de l’équité, de la santé et de la sécurité du travail (CNESST), to name a few, not to mention the audit of existing government records.

The information generally required by a tax audit may cover all or part of a construction project, including:

  • A detailed list of labour costs;
  • Internal work orders;
  • A list of suppliers and subcontractors;
  • CNESST certificates of compliance;
  • Construction site progress reports submitted to the CCQ;
  • Construction site opening and closing notices;
  • All data accumulated and/or generated by software used in the industry.

When consulting these documents, the tax authorities will be looking for links to the financial information recorded in the accounting records used to file the company’s income tax return for a given fiscal year. This allows them to make sure there are no incongruities or hidden amounts.

Contractors’ Tax Obligations

The main objective of the tax authorities is, of course, to ensure compliance with the law and the reporting of all business income.

Contractors are obligated to cooperate with the tax authorities during an audit, except in the case of a penal or criminal investigation. Failure to cooperate (in civil matters) puts the company at risk of various penalties,[2] such as the addition of unreported income, the denial of a tax credit (which increases the business’s GST/QST bill) or the addition of shareholder benefits.[3]

Generally speaking, as ours is a self-reporting system, it is up to taxpayers to report all their income and comply with the tax rules in force. Consequently, contractors must keep the information required by tax laws for a period of at least six years. Note that if you want to destroy this documentation after the statutory six-year period, you must fill out a form requesting permission from the tax authorities to do so.

However, it is advisable to keep tax documentation for a period of ten years—just in case!

Risks Associated with Non-cooperation in a Tax Audit and Being Found Guilty Following a Penal or Criminal Investigation

As mentioned above, failure to cooperate with the tax authorities during an audit can result in various penalties, primarily aimed at adjusting the company’s reported income according to the tax authorities’ assessment. This can lead to a lengthy dispute lasting several years.

Of course, once the tax authorities have exhausted the mechanisms for requesting information, the Act allows them to apply to the court with a peremptory request to produce documents and information when the company refuses or fails to do so.[4] Non-compliance with these requests can lead to hefty penal fines.

As a last resort, the tax authorities are allowed to estimate income using alternative calculation methods. Although these methods can be contested at a later date, a company’s refusal to cooperate during an audit often works against it in the appeal process.

Finally, there may be other negative consequences that could affect the company’s day-to-day operations. For example, tax authorities may cancel a GST/QST registration certificate, or suspend, revoke or refuse to issue a GST/QST certificate, thereby affecting the contractor’s obligation to provide such a certificate, particularly in the context of public contracts.

Tax authorities also have wide powers of seizure, which can also affect a company’s ability to pay.

So, it is best to be able to provide what they ask for!

Reminder: The Impact of a Tax Violation

It is important to note that a conviction for a tax offence resulting from a penal or criminal investigation can directly affect the contractor’s licence issued by the RBQ.[5]

In fact, the contractor’s licence can be suspended in cases where, for example, the company or one of its officers has attempted to evade taxes by using an illegal employment scheme[6] or making false documents and entries,[7] has falsified an attestation from Revenu Québec,[8] has made false statements,[9] and so on. Furthermore, the company is obligated to notify the RBQ in the event of a conviction.[10] Offences of a purely criminal nature may give rise to harsher measures, such as cancellation of the licence altogether.

The violation of a tax law may also affect a business’s ability to obtain or maintain in force the authorization issued by the AMP to enter into public contracts and subcontracts,[11] as well as its RBQ licence. The company may also run the risk of being entered on the Register of enterprises ineligible for public contracts (RENA), which would prevent it from bidding on public contracts or subcontracts for a specified period. This could also lead to the suspension of a current contract.

Finally, any conviction for a penal offence can be publicized by the tax authorities via publications on the Revenu Québec website, not to mention the bad publicity associated with a lost court case.

When it comes to tax matters, caution and cooperation are key for any construction company and its leaders.

***

[1] See also section 288 et seq. of the Excise Tax Act (R.S.C 1985, c. E-15).
[2] Section 39.2 of the Tax Administration Act, CQLR c. A-6.002.
[3] Additional income on which the shareholder must pay tax.
[4] Supra, note 2.
[5] Sections 60 and 70 of the Building Act, CQLR c. B-1.1.
[6] Constructions Plante & Fils inc. (Re), 2010 CanLII 38210 (QC RBQ).
[7] Régie du bâtiment du Québec v. Northern Construction & Suppliers Ltd., 2013 CanLII 65612 (QC RBQ).
[8] Régie du bâtiment du Québec v. Enviro Transpex inc., 2024 QC RBQ 61.
[9] Régie du bâtiment du Québec v. Les Constructions Matrix inc., 2013 CanLII 85177 (QC RBQ).
[10] Section 67, Building Act, CQLR c. B-1.1.
[11] Section 21.4 and Schedule I of the Act respecting contracting by public bodies, CQLR c. C-65.1.

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