Canada - English

Prepare for Cash Flow Impact of QST Change for Employee Expense Accounts 

Canadian Tax Adviser

 

October 29, 2013

 

Annette Beshwaty and Steve Buchanan
Montreal, Indirect Tax

 

Revenu Quebec has recently released additional information relating to the upcoming elimination of the 5% simplified method used by many large businesses to claim QST input tax refunds (ITRs) for employee expense accounts. Large businesses will no longer be entitled to use the 5% simplified method for expenses incurred by their employees or allowances paid to these individuals on or after January 1, 2014. These businesses may want to encourage their employees to file their 2013 expense accounts early in December to allow time to pay these claims by December 31, 2013 and to make the transition easier.

The 5% simplified method for large businesses will be replaced by a factor method for some expenses. Qualifying large businesses will be able to claim eligible ITRs relating to expense reimbursements paid to employees by using a 9/109 QST factor method. For expense allowances paid to employees, an eligible ITR will be claimed based on a 9.975/109.975 tax fraction of the qualifying expense allowances.

 

The QST factor method and the tax fraction method will not apply on restricted goods and services for large businesses for claiming ITRs. These large businesses will not be eligible to claim any ITRs on such restricted expenses.

 

A business is generally considered a "large business" if its total taxable supplies and those of the business' associates exceed $10 million for the preceding fiscal year.

 

The effect of new factor method
The effect of the elimination of the 5% simplified method will depend on the type of expenses incurred by the employees. If the expenses are mostly goods and services that are subject to the ITR restrictions for large businesses, the effect of the new factor method will be significant. Such a large business would generally see its ITR claim go from 5% of the amount on the employee expense accounts relating to Quebec to 0%.

 

The following table generally shows for a few types of expenses the effect of the elimination of the 5% QST simplified method for large businesses that currently use the method.

 

https://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/CanadianTaxAdviser/PublishingImages/13-45c[2].png

 

Employers must meet conditions to claim ITRs
Large businesses must meet several conditions and documentation requirements to be eligible to claim ITRs relating to expenses on their employee expense accounts.

 

For example, over the last few years, Revenu Quebec has reiterated the importance of the condition relating to "personal expenses incurred by an employee in the course of the employer's activities". If an expense does not qualify as a "personal expense" but rather as a "business expense" and that expense is subject to one of the QST restrictions (e.g., entertainment), the 5% QST simplified method should not apply and thus no ITR can be claimed on that expense. The determination of whether an expense qualifies as a "personal" or a "business" expense is a question of fact.

 

The elimination of the QST simplified method is a good opportunity for many large businesses to review their entire processes relating to employee expense accounts and determine whether they meet all the conditions and documentation requirements. The review would also allow these businesses to determine the required changes to adapt systems to the new methods and how much the new methods may affect certain costs.

 

For more information, please contact Annette Beshwaty at (514) 840-2349.

 

 

 

 


 

Information is current to October 29, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

Publications

Canadian companies may be interested in these recent publications: