Indirect Taxes: A Strategic Risk Still Too Often Underestimated by Businesses

What exactly are indirect taxes?

Indirect taxes are taxes that do not apply directly to income, but rather to specific transactions, such as the consumption, sale or importation of goods and services. In Canada, the most common examples are the Goods and Services Tax (GST), the Harmonized Sales Tax (HST), the Quebec Sales Tax (QST), as well as certain provincial sales taxes, excise duties and customs duties.

Why are indirect taxes often seen as a simple administrative issue?

According to Malak, this perception stems from the fact that businesses often treat taxes as a repetitive and highly standardized process: “Many businesses view indirect tax management as an administrative routine: invoicing, collection, return filling and remittance.”

However, this simplified view masks what is in reality a highly technical legislative framework. She notes that “indirect taxes are governed by complex legislative rules, with numerous exceptions, and often require proper transaction characterization, a rigorous review of documentation and applicable rules.”

This complexity often becomes apparent during an audit conducted by tax authorities, when businesses realize that the rules are far more complex than they had assumed. A single mistake can then result in significant costs, particularly due to interest and penalties that accumulate quickly.

She also emphasizes that responsibility for indirect taxes does not rest solely with the business itself. In certain circumstances, company directors may also be held personally liable.

Why do indirect tax errors often go unnoticed within businesses?

These errors often go unnoticed because businesses rely on long-established habits and internal processes. As Malak explains, “there is a certain degree of automation in processes, but above all a tendency to mechanically repeat the same internal practices without always reassessing them. This logic often rests on an implicit assumption: ‘This is how we have always done things”

Yet these practices are not always challenged, even when the regulatory environment changes. She also notes that “several rules have been modified in recent years without businesses always being aware of them, which creates a hidden risk.”

How can small errors end up becoming very costly?

An error that appears minor at first can quickly escalate, both for GST/HST and QST purposes. “Interest compounds daily, both federally and in Quebec, which can quickly increase the total cost,” explains Malak.

Significant penalties may also apply. In Quebec, penalties related to QST may reach up to 15% in certain situations. The most critical point is that, unlike the tax itself, penalties and interest generally cannot be recovered from customers. They must be fully absorbed by the business, directly affecting profitability.
 

Why are growing businesses more vulnerable?

During periods of growth, decisions often need to be made quickly, and indirect tax considerations are frequently postponed. Yet these issues should be addressed from the outset, as they can have significant financial implications for the organization.

As Malak points out, “organizations often have the reflex to assess income tax consequences early in the process, whereas indirect tax issues are more often reviewed only at a later stage.”

Why is it important to adopt a proactive approach to indirect taxes?

For Malak, it is essential not to view indirect taxes as a mere administrative formality. “Indirect taxes are not only a compliance matter; they also have a direct impact on cash flow and business performance.”

She also stresses that “many businesses overlook amounts they could recover simply because they are unaware of the various recovery opportunities available to them.”