Your HST checkup; Recapture of ITCs; Quebec update
Canadian Indirect Tax News, December 23, 2010
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Your business has spent the better part of the last year navigating the complex transitional rules, updating systems, changing processes, and training staff to accommodate the introduction of the harmonized sales tax (HST) in British Columbia (B.C.) (12%) and Ontario (13%). With the rush of HST implementation behind you, as well as several months of operating data now available, this is the time to check your systems and procedures for HST compliance. Consider the following:
- Large businesses are required to track and recapture input tax credits (ITCs) for the provincial component of the HST on purchases of specified energy, specified telecommunications services, meals and entertainment expenses, and qualifying motor vehicles. The Canada Revenue Agency (CRA) has indicated that penalties will apply if the amount of recaptured ITCs (RITC) for B.C. and Ontario are not accurately reported on the goods and services tax (GST) return. Additionally, some large businesses that have not reported any RITCs to date have already received letters from the CRA as a reminder of this obligation!
- The place-of-supply rules for services and intangible property have undergone significant changes. These rules determine which rate of tax should be charged, and the onus is on the supplier to collect the correct amount of tax from a customer.
- Factors for calculating the GST/HST included in employee allowances and reimbursements, as well as Quick Method factors and MUSH sector rebate percentages, have changed to reflect the rate increase from 5% to 12% in B.C. and to 13% in Ontario
- New electronic filing requirements, effective July 1, 2010, may limit the ways in which your business is permitted to file a GST return
Without adequate review and testing, small errors today can amount to large liabilities over time. What should you look for to ensure your next GST audit doesn’t uncover costly surprises?
- Ensure that you have sufficient documentation to support your tax position. For example, keep a copy of shipping documents to support the place-of-supply for the sale of goods. Invoices for supplies of services should show the recipient’s address that was used to determine the place of supply.
- Use working papers and/or reports from your accounting system to show how RITCs were tracked and reported
- Test transactions that straddled the July 1, 2010 HST implementation date to ensure the transitional rules were properly applied
- Review the tax coding for documentation such as stock keeping units (SKUs), purchase orders, and customer profiles, to ensure rates have been updated accordingly
Contact your Deloitte Indirect Tax consultant if you have any questions or need assistance with any step of the post-HST implementation review process.
One of the four expense categories subject to the RITC rules, which restrict the recovery of a portion of the tax paid on certain expenses, is meals and entertainment expenses. Meals and entertainment expenses that are subject to the 50% restriction for income tax and GST/HST purposes are subject to the RITC rules.
What is to be restricted?
A business must first establish whether an expense is restricted for income tax and GST/HST purposes. Typical examples of expenses that are restricted are business dinners and tickets to a sporting event or theatre.
If the expense is not restricted, then the particular expense will not be subject to the RITC rules. The following expenditures are not subject to the RITC rules:
- Long-haul truckers are not affected
- Food, beverages, and entertainment provided for compensation (e.g., acquired for resupply) are excluded
- Other exclusions under the Income Tax Act where the 50% restriction does not apply (e.g., annual holiday party)
What is to be claimed and/or restricted?
The RITC is applicable to only those meal and entertainment expenses that are incurred in B.C. and Ontario. If the expense is incurred in a non-HST province, the RITC rules are not applicable.
The RITC is a recapture of the provincial component of the B.C. and/or Ontario HST amount. The business must claim the full ITC on their HST return but, at the same time, “recapture” the provincial component of the HST. This is due to the CRA’s obligation to pay the B.C. and Ontario governments the amount of recaptured ITC. By showing the amounts separately on the return, the CRA is able to determine its obligation to the B.C. and Ontario governments.
XYZ Company holds a business meeting in Vancouver, B.C. The 12% HST paid is $120 ($50 is GST and $70 is the provincial component of the HST). The normal restriction is to allow only 50% of the GST/HST component. The RITC rule for B.C. and Ontario HST is to recapture the rest of the provincial component of the HST. The total net ITC to be claimed in this example is $25, or 21% of the total HST paid (i.e., $50 x 50% = $25).
Large businesses have the option of recapturing ITCs for meals and entertainment expenses each time that the amount is paid (i.e., by tracking the RITC and net ITC on each transaction and reporting these on that period’s GST/HST return) or at year-end (i.e., by recapturing the ITCs for that year’s meals and entertainment expenses on the final GST/HST return for the year).
Penalties for not correctly complying with the RITC rules will range from 5% to 10% in addition to the amount of the GST/HST error. We will most likely see some audit attention in this area over the coming months and years as the CRA establishes routine procedures to monitor compliance with these complex rules.
The 2009-2010 Quebec budget announced a 1% increase to the Quebec Sales Tax (QST) rate from 7.5% to 8.5%. The rate increase is effective January 1, 2011. Taxable supplies of tangible personal property or services will be subject to the 8.5% QST rate if all or part of the consideration for the supply becomes due and is paid after December 31, 2010. Please note that the QST applies on top of the GST; thus, the effective combined tax rate as of January 1 will be 13.925% (1 x 5% GST x 8.5% QST).
Several factors used to calculate the net tax have been adjusted accordingly. Effective January 1, 2011, the specified percentage under the simplified method for large businesses will be increased from 4.1% to 4.5%, and the specified factor under the simplified method for small and medium businesses, charities, not-for-profit organizations, and public service bodies will be increased from 7/107 to 8/108.
In addition, there are rumours that Quebec is considering harmonization of the QST with the GST; however no official announcement regarding harmonization has been made.
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.