October 31, 2013
Does your business have to recapture certain input tax credits it has claimed under the harmonized sales tax (HST) rules? Many large businesses in Canada are still struggling with the recaptured input tax credit (RITC) rules, which were introduced with the Ontario and British Columbia HST on July 1, 2010. Since the CRA has begun to audit businesses’ compliance with these rules, now is a good time to ensure you’re following them correctly.
Large businesses are generally required to repay to the CRA the provincial component of the HST claimed as input tax credits (ITCs) on four types of commodities: energy, telecommunications, meals and entertainment expenses and some motor vehicles. These businesses are not entitled to simply forego claiming the ITCs; technically they should claim the eligible ITCs then separately identify and repay the recaptured ITCs when they file their GST/HST returns.
|Is your business properly reporting recaptured ITCs? |
Some questions to consider:
- Is your business considered a “large business” subject to the RITC rules — Does your business (and its associated entities) have more than $10 million in GST/HST taxable sales in Canada or is it a financial institution?
- If your business is a large business, do you purchase any of the four types of commodities subject to the RITC requirements?
- Do any of the special RITC rules or exceptions apply to your business?
- Does your business recapture and report RITC amounts correctly?
The RITC rules apply currently for Ontario and Prince Edward Island HST and applied to B.C. HST until March 31, 2013. Under these rules, a large business must recapture ITCs, even if the ITCs have not been claimed, and identify the amounts separately on its GST/HST return.
Similar rules apply for Quebec Sales Tax (QST). However, for QST purposes, a large business cannot claim input tax refunds for QST paid on specified goods and services and there is no specific reporting. Note that special QST rules apply for certain financial institutions starting January 1, 2013 (see KPMG’s TaxNewsFlash-Canada 2012-40, “New QST Ins and Outs — Get Ready for January 1, 2013”).
The RITC requirements for Ontario HST are in force until July 1, 2015, at which time the obligations will be phased out over three years. The P.E.I. HST, which became effective April 1, 2013, also includes RITC rules that will apply for a similar five-year period and a three-year phase-out period.
Canadian businesses’ common issues with RITC requirements
Since the RITC rules were introduced, many businesses have faced the following common issues. A review of these common issues may help you assess how your business is addressing the RITC requirements.
Definition of a large business
Under the RITC rules, a business is generally considered to be a large business if its taxable sales and those of its associated entities made in Canada are greater than $10 million in the previous year. Some companies do not have to meet the $10 million threshold to be considered large business, for example, many different categories of financial institutions.
Some common but costly errors in the calculation of the $10 million threshold for large businesses are:
- Not including the sales of all associated entities or sales made outside Canada by a permanent establishment in Canada
- Overlooking an associated entity for GST purposes (e.g., individuals or partnerships)
- Not applying the RITC rules to new entities that recently joined the associated group of businesses
- Not applying the RITC rules for merger and amalgamation transactions.
Issues with specified goods and services
The RITC rules generally apply to four types of specified goods and services: energy, telecommunications, meals and entertainment expenses and motor vehicles under 3,000 kg. Each of these goods or services is subject to specific rules and exceptions. Since RITC errors may have created liabilities that have been accumulating over the last three years, businesses may want to review and evaluate their compliance with the RITC rules and determine whether any corrective measures are warranted.
RITC warning signs
You may need to review your RITC requirements and your processes if any of the following issues relating to specified goods and services apply to your business.
- Is your business using electricity for the production of goods for sale and for other uses? If so, how do you determine which portion of the energy is subject to the RITC requirements?
- As a lessor or a lessee of real property, are your energy or telecommunication services included in your lease agreements? If so, how do you apply the RITC rules to the component of energy or telecommunication services in the lease payments?
- How do you differentiate the telecommunication services that are subject to the RITC rules on your telecommunication invoices?
- How do you apply the RITC rules to leased vehicles? How do you apply the RITC rules to fuel used in qualifying motor vehicles?
- How do you apply the RITC rules on parts and services for qualifying motor vehicles?
- How do you apply the RITC rules on your employee expense accounts?
- Have you adjusted your systems to account for the elimination of the RITC rules in B.C. on April 1, 2013?
Special cases and exceptions
Under the RITC requirements, special rules and exceptions can apply to many large businesses. For example, the RITC rules do not generally apply for qualifying motor vehicles acquired for the sole purpose of resupplying them. However, should the large business use the specified vehicle before it is resupplied, such as a demo vehicle used by a large car dealership, the large business is generally required to recapture some component of the ITCs. Large businesses should understand how these and other special RITC rules and exceptions apply to their operations.
A few common issues relating to special RITC rules and exceptions include:
- Has the large business elected to use a production proxy for specified energy? If so, has the large business used the appropriate code for its activities to determine the eligible production proxy? Has the required election form been properly filed?
- Is the large business using an estimation/reconciliation method for accounting of RITCs?
- How did the large business deal with the RITC rules for specified goods and services brought into Ontario, P.E.I. or B.C.?
- How does the large business apply the RITC rules on transactions relating to specified goods and services with related parties?
Accounting for RITCs
As noted above, large businesses are not entitled to simply forego claiming ITCs relating to specified goods and services. The RITC rules provide specific requirements as to the timing and the manner of accounting for the RITCs. Businesses are required to repay the RITCs in the reporting period in which the ITCs were available even if these ITCs have not been claimed yet. Thus, not claiming the original ITC does not eliminate the requirements of the RITC rules. A special penalty applies specifically when RITC requirements are not met. Also, large businesses are required to identified the RITC amounts separately when filing their GST/HST returns.
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We can help
Your KPMG adviser can help you manage the impact of these and other federal or provincial indirect tax rules that may affect your business. We can help you manage your indirect tax compliance obligations in all relevant jurisdictions and also help you ensure that you are not missing refund opportunities. For details, contact your KPMG adviser.
Information is current to October 31, 2013. The information contained in this TaxNewsFlash-Canada 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.
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