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Ontario HST input tax credit recapture rules

Canadian Indirect Tax News, February 8, 2010 (10-2)


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Who is subject to the RITC requirement?
What purchases are subject to the RITC requirement?
Proxies for specified energy
Proxies for specified telecommunication services
When are RITCs required to be accounted for?
How are RITCs required to be accounted for?
Other things to consider

On February 1, 2010, the Ontario government released Information Notice No. 5 to describe the proposed rules regarding the recapture of input tax credits (RITC), specifically the 8% Ontario component of the Harmonized Sales Tax (HST). The Notice and related publications are available on Ontario’s web site: http://www.rev.gov.on.ca/en/notices/hst/05.html.

The Notice indicates that the RITC requirement would be similar to the existing restriction on input tax refunds for large businesses for Quebec Sales Tax (QST) purposes. While this is true, there are notable differences. For example, Ontario has chosen to use a recapture method to effectively restrict the ITCs whereas for QST purposes the input tax refunds are, in fact, restricted (i.e., not claimable in the first place). This results in different reporting requirements. Ontario has also announced specific proxies that can be utilized in certain circumstances as well as an option to use an estimation/installment approach to deal with the recapture on a monthly basis with a subsequent true-up.

The RITC rules are important for affected HST registrants as they will impact registrants’ costs, systems and compliance obligations.

We have set out summary tables in this newsletter to cover who is affected by these rules, what specific purchases are affected, when and how the RITCs are required to be reported and, lastly, other things to consider.

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Who is subject to the RITC requirement?

Table 1 sets out who is and is not subject to the RITC requirement.

Table 1

Who is subject to the RITC requirement?

Large Businesses that are HST registrants

RITC threshold exceeds $10 million for the recapture period*

 

Threshold amount for the recapture period includes inter alia all consideration for taxable supplies made in Canada, or outside Canada through a permanent establishment in Canada, by the person (and HST registrants associated with that person) that became due, or that was paid without becoming due, in the last fiscal year of the person before the recapture period.

Specified financial institutions (excluding selected listed financial institutions)

 

 

  • banks;
  • credit unions;
  • trustees (licensed);
  • insurers;
  • segregated funds of insurers;
  • investment plans (e.g., pension plans, mutual funds);
  • persons related to any above financial institution.

Who is not subject to the RITC requirement?

Persons who are not HST registrants
Public service bodies**
Persons whose chief source of income for federal income tax purposes is farming
Persons who are not large businesses

* The recapture period generally means a one year period that begins immediately after June 30th and ends immediately before July 1st of the following calendar year. There are also proposed rules to address changes during a recapture period, such as acquisition of a small business by a large business, exceeding the threshold during a recapture period, etc.

** A public service body is a non-profit organization, a charity, a municipality, a school authority, a public college or a university.

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What purchases are subject to the RITC requirement?

Table 2 sets out what property and services are generally subject to the RITC requirement. A proxy method may be used for specified energy and specified telecommunication services. Please see Tables 3, 3.1 and 4 for a summary of the respective proxy methods.

Table 2

Specified property and services acquired, or brought into Ontario, by a large business for consumption or use by that business in Ontario are subject to the RITC requirement.
(RITC requirement does not apply to property and services acquired for resupply.)

Specified road vehicles, including certain vehicle parts and services, and motive fuel (other than diesel) for use in specified road vehicles

 

 

Specified road vehicle is:

  • a motor vehicle;
  • licensed, or required to be licensed, under applicable provincial laws for use on a public highway; and
  • weighs less than 3,000 kg at the time that the vehicle is first licensed or required to be licensed in Ontario.

Restriction on vehicle parts and services generally applies to non-routine repair or maintenance carried out within 12 months of acquiring the vehicle or bringing it into Ontario (e.g., vehicle anti-theft system).

 

Specified energy

  • Electricity
  • Gas
  • Fuel (other than fuel used in a propulsion engine)
  • Steam

 

 

RITC requirement generally would apply RITC requirement generally would not apply

Specified energy used by the large business to facilitate production (i.e., not used directly in production), including energy for light, heat, air conditioning or ventilation of a production facility;

Specified energy used to produce tangible personal property (TPP) used by the business:

  • otherwise than for sale;
  • in the construction of real property; or
  • in the course of supplying services or intangible personal property;

Specified energy provided by a lessor to a lessee as part of a single supply of a real property lease

  • lessor not able to claim relief from the RITC requirement per the manner in which the lessee uses the energy, e.g., lessee uses the energy directly in the production of TPP for sale by the lessee;

Consideration for transportation services incidental to the supply of the specified energy.

Specified energy used directly in the production (as defined) of:

  • TPP for sale by the large business, or
  • production equipment (as defined) used by the large business in the production of TPP for sale by the large business;

Specified energy used to produce another form of energy that is used in a manner whereby the RITC requirement would not apply if the specified energy were used directly;

Specified energy used directly in activities that are eligible scientific research and experimental development (SR&ED) activities in Ontario for purposes of the Taxation Act, 2007 (Ontario);

Specified energy acquired by a lessee as part of a single supply of a real property lease;

Consideration for transportation services that are not incidental to the supply of the specified energy.

 

 

Specified telecommunication services

  • the service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system; and
  • the making available for such emission, transmission or reception telecommunications facilities of a person who carries on the business of supplying services referred to above
RITC requirement generally would apply RITC requirement generally would not apply
  • local and long-distance telephone;
  • cable and pay television, satellite television;
  • facsimile and electronic mail;
  • video, audio and computer link-ups and data transmission;
  • a telecommunication line supplied by way of lease, licence or similar arrangement.

 

  • internet access services;
  • web-hosting services;
  • toll-free telephone services (e.g., 1-800 or 1-877 services);
  • telecommunication services acquired by a sponsor or organizer of a convention for use exclusively at that convention.

 

 

Specified meals and entertainment

 

 

RITC requirement generally would apply RITC requirement generally would not apply

Food, beverages, and entertainment, to the extent that they are subject to the existing (generally 50%) ITC repayment requirement, including:

  • business dinners;
  • tickets for theatre, concerts, athletic events or other performances;
  • private boxes at sports facilities;
  • admissions to nightclubs, athletic, social and sporting clubs.

 

 

  • meals or entertainment acquired solely for the purpose of resupply (e.g., by a restaurant or airline);
  • meals or entertainment acquired for certain events where all employees from a particular location are invited (e.g., an office Christmas party);
  • meals or entertainment for an employee in situations where the expenses are required to be included in the employee's income as a taxable benefit for federal income tax purposes.

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Proxies for specified energy

A large business producing TPP for sale (and carrying on such production activities primarily in Ontario) would generally be able to elect to use a proxy percentage to determine what portion of the specified energy that it acquires for use in Ontario would be considered to be used directly in the production of TPP for sale (and, therefore, on which no RITC would apply). The election to use the proxy would have to be filed with the Canada Revenue Agency (CRA) before the start of the recapture period and would generally apply for the entire recapture period. The proxy percentages are based on North American Industry Classification System (NAICS) for 2007 (NAICS codes are noted in Table 3 below).

Table 3 sets out the proxy percentages for large businesses whose most significant business activities fall within the categories described therein. If the most significant business activity of a large business does not fall within one of the categories, no proxy would be available and the business would have to use another approach acceptable to the CRA.

Table 3

96% (RITC applies to remaining 4%) 87% (RITC applies to remaining 13%) 70% (RITC applies to remaining 30%)
  • 113 forestry and logging;
  • 211 oil and gas extraction;
  • 212 mining and quarrying (except oil and gas);
  • 322 paper manufacturing;
  • 324 petroleum and coal product manufacturing;
  • 325 chemical manufacturing;
  • 327 non-metallic mineral product manufacturing;
  • 331 primary metal manufacturing.

 

 

  • 311 food manufacturing;
  • 312 beverage and tobacco manufacturing;
  • 313 textile mills;
  • 314 textile product mills;
  • 321 wood product manufacturing;
  • 326 plastics and rubber products manufacturing;
  • 332 fabricated metal product manufacturing.

 

 

  • 315 clothing manufacturing;
  • 316 leather and allied product manufacturing;
  • 323 printing and related support activities;
  • 333 machinery manufacturing;
  • 334 computer and electronic product manufacturing;
  • 335 electrical equipment, appliance and component manufacturing;
  • 336 transportation equipment; manufacturing
  • 337 furniture and related product manufacturing;
  • 339 miscellaneous manufacturing.

Table 3.1 describes the SR&ED proxy formula that can be used instead of tracking the actual amount of specified energy used directly in qualifying SR&ED activities. If a large business is using both the production percentage proxy and the SR&ED proxy formula, the Notice provides for an ordered application of the proxies. The SR&ED proxy would be applied to the specified energy acquired for use in Ontario and then the production percentage proxy would be applied to the residual amount (versus adding the two percentages together and applying the sum).

Table 3.1

A = B/C

A Proportion of the specified energy considered to be used directly in qualifying SR&ED activities in Ontario
B Total amount of the portion of the salaries and wages of employees of the large business directly engaged in SR&ED activities in Ontario
C Total amount of salaries and wages of employees of the large business in Ontario

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Proxies for specified telecommunication services

Table 4 sets out the proxy percentages for specified telecommunication services, and describes when such proxies are available and the particular criteria that must be satisfied for each proxy percentage.

Table 4

When is a proxy available?

Proxy methodology

Criteria

Proxy Percentage* 

Component elements of a single supply include specified telecommunication services PLUS other services and/or goods not subject to RITC requirement;

and

The portion of the provincial component of the HST attributable to the other services and/or goods not subject to the RITC requirement is not readily ascertainable from the invoice.

 

Supply includes:

  • specified telecom services;
  • other services; and
  • goods (e.g., telecom equipment rental).
14% (RITC applies to remaining 86%)

Supply includes:

  • specified telecom services; and
  • other services (but no goods).
4% (RITC applies to remaining 96%)

Supply includes:

  • specified telecom services; and
  • goods (but no other services).

11% (RITC applies to remaining 89%)

 

* No RITC – consideration is deemed to be for services and goods other than specified telecommunication services.

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When are RITCs required to be accounted for?

A large business would generally be required to account for RITCs in its HST return for the reporting period in which the provincial component of the HST to which the ITCs relate becomes payable, or is paid without having become payable.

However, a large business would generally be allowed to make an election to use an estimation, installment and reconciliation approach to account for RITCs. The election would be filed with the CRA after the end of the fiscal year of the large business (and before July 1, 2010 for 2010) and it would apply for at least one year.

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How are RITCs required to be accounted for?

Large businesses would be required to calculate and report their RITCs in their HST NETFILE return. Table 5 sets out the separate reporting fields which are to be used to calculate the net ITC amount eligible to be claimed as an ITC.

Table 5

Separate field on HST return Description
Gross ITCs ITCs and adjustments that a registrant is entitled to claim before taking into account any ITC recapture
RITCs – Ontario RITCs for the provincial component of the Ontario HST*  X  the recapture rate in effect at the time (see table below)
RITCs – British Columbia RITCs for the provincial component of the British Columbia HST*  X  recapture rate in effect at the time (see table below)
Net ITCs Gross ITC less RITCs
Total ITCs and adjustments Net ITC amount is eligible to be claimed as an ITC

* RITCs are generally required to be reported in the period in which the provincial component of the HST became payable.

For further details please see the CRA’s January 4, 2010 News Release and Backgrounder entitled "Government of Canada announces new electronic filing requirements for GST/HST registrants".

The RITC rate is 100% for the first five years. It will be phased out thereafter through a progressive rate reduction. Table 6 sets out the phase-out schedule for the RITCs.

Table 6

Recapture rate Period
100% July 1, 2010 to June 30, 2015
75% July 1, 2015 to June 30, 2016
50% July 1, 2016 to June 30, 2017
25% July 1, 2017 to June 30, 2018
0% On or after July 1, 2018

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Other things to consider 

The disclosure and invoicing requirements for the Ontario component of the HST will follow the existing rules for the GST and the HST.

Large businesses that import specified property or services into Ontario (from another province or another country) for use in Ontario would be subject to the same RITC requirements as apply for specified property or services acquired in Ontario.

The RITC requirement would also apply to specified property and services acquired by a large business that does not pay the 5% federal component of the HST to the supplier because an election for nil consideration is in effect. Additionally, the RITC requirement would extend to a supply of specified property and services made to a large business for no consideration or for less than fair market value consideration, between persons who are not dealing with each other at arm’s length, even if the large business acquired or imported the supply exclusively for consumption or use in the course of its commercial activities.

Ontario has indicated that anti-avoidance rules specific to the RITC requirement may be implemented to ensure the integrity of the system.

Deloitte can assist with preparing and planning for the RITC rules or any other aspect of HST preparation and implementation.

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This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.