Tax complexities result in compromised care

Being tax-compliant is important since the penalties can be high for those who aren’t. Yet Canada’s complex tax system and obscure rules can lead to unexpected surprises and costly impacts.

Canadians are living longer, and as they get older, they need more care. Over 400,000 elderly people live in long-term or residential care in Canada. It is a growing challenge for governments to find resources to provide a home and round-the-clock care for the people who need it most. And the tax system sometimes makes that task even harder.

Consider Ottawa’s Hemlock Manor* home for seniors, which cares for over 100 residents. In 2014, after operating for four years, the charity running the home got an unexpected surprise. The Canada Revenue Agency (CRA) advised the charity that it owed $1 million in Harmonized Sales Tax (HST) arrears, plus $350,000 in penalties and interest.

Without access to specialist advice upfront, Hemlock had become tangled in an obscure Excise Tax Act rule that states that anyone who puts up a residential building and then lets someone else live there is deemed to have sold the building to themselves at fair market value. The charity thus became liable for 13 per cent HST as soon as the first resident moved in. 

Faced with a crippling tax bill and personal liability, Hemlock’s volunteer board was forced to make some hard decisions that affected the lives of residents and staff. In an effort to keep providing care, the board delayed upgrading residents’ beds and fell behind on wages for nurses and other staff.

The board spent two years appealing the CRA’s ruling. The agency eventually allowed an 83 per cent HST rebate and reduced the penalties. Even so, Hemlock took a hit of about $150,000 — not to mention the emotional strain on staff and residents, and the stress on their families.

*This is a real case study received from a CPA member. Names and locations have been changed to protect sensitive information.