HST Input Tax Credits
1. What evidence do I need to recover the HST I paid?
As a registered taxpayer, you may claim an input tax credit if you have “obtained sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined”. This evidence is prescribed by the legislation and the Regulations.
Depending on the amount of the transaction, the amount of information that you need to retain varies. For example, purchases under $30 require that you retain documentation with the name of the supplier, the date of the invoice and the amount payable whereas transactions greater than $30 but less than $150 also requires the supplier’s HST registration number and the amount of the HST charged (and which items are taxable). For transactions greater than $150, you will also need your Company’s name on the invoice, the terms of payment and a description of the supply.
2. How can I make sure that my vendor is really registered to charge me HST?
Since you need your supplier’s HST registration number to allow you to recover the HST you have paid, you may want to validate the HST number that is quoted on the invoice. The CRA has a web registry (www.cra-arc.gc.ca/gstregistry.com) that enables you to confirm the number is valid. You will need the name of the business, the HST number you would like to check and the date of the transaction.
3. What if lose my “documentation”?
Reading the legislation, one would think that you would need to produce the documentation that gave rise to your claim for an input tax credit. However, the courts have supported the idea that the registrant merely had to have the documents at some time in the past, before filing the return; that is, to offset the rigid enforcement of obtaining the “prescribed information”, there is an argument to be made that the phrase in subsection 169(4) “the registrant has obtained sufficient evidence” could be interpreted as follows: as long as the taxpayer has the information at the time the return is filed then that is sufficient without the necessity of presenting “any such information as may be prescribed”.
4. I have heard that not all HST paid is recoverable. Why are some of these payments of HST “restricted”?
Certain rules exist that restrict or limit the ITC entitlement either because of the nature or the type of the supply, or because there is a significant element of personal consumption or employee personal use. For instance, a general rule relating to ITCs is that a registrant cannot claim the ITC on property or services that are for the exclusive (i.e., 90% or more) personal consumption of an individual.
For example, a registrant is not entitled to claim an ITC in respect of the GST/HST paid or payable on a membership in a club the main purpose of which is to provide dining, recreational or sporting facilities.
5. Why is HST sometimes “recaptured”? Do I have to repay some of the HST I recovered?
Subsection 173(1) (Taxable Benefits) operates very differently than section 170 (Restrictions), but with the same ultimate objective. Rather than denying an input tax credit on the exclusive, personal enjoyment of an expense (in section 170), section 173 effectively forces GST to be paid on the portion of the supply that is made available for personal use to an employee or shareholder.
For example, with respect to a company owned or leased automobile, the property that the employee is allowed to use is generally deemed to be used in commercial activities by the employer. Accordingly, the employer is able to claim a full input tax credit for this use of the automobile. The GST “disallowance” or “recapture” of that ITC is effectively done by deeming the employer to have collected GST from the employee on the employee’s personal use of the automobile.
6. Is it true that I don’t get back all the HST I spend on Meals & Entertainment?
The Excise Tax Act mirrors the Income Tax Act in limiting input tax credits for meals and entertainment to 50% of the HST paid. This reflects the concept that a portion of meals and entertainment is personal enjoyment.
Technically the rule does not limit the ITCs claimed under subsection 169(1). Instead, it requires an addition to net tax of one-half of the ITCs claimed for meals and entertainment. The 50% limitation applies to the cost of food or beverages for human consumption including any related expenses such as taxes and tips.
7. I receive an allowance from my employer for travel costs. Does my employer recover some HST from my allowance?
Where your employer has paid you a reasonable allowance for travel and for other expenses, the “consumption” of that expense is deemed to be that of your employer, as if your employer incurred the expenses directly.
The expense (i.e. the allowance) is treated as tax-included and your employer is entitled to claim an input tax credit related to the expense.
Since an allowance is not defined in the Excise Tax Act, there are guidelines to determine what constitutes an allowance for this purpose. The amount must be limited and predetermined. It must relate to the business. The allowance is under the control of the employee and there is no requirement to repay or account for the payment.
It’s important to distinguish between the various types of expenses that the allowance is deemed to cover such that restrictions are applied appropriately (e.g. for meals and/or out of country expenses).
8. I am reimbursed for expenses I incurred personally on behalf of the Company. Who gets to recover the HST?
When you are reimbursed for an expenditure that you incurred on behalf of the Company, then the Company is deemed to have incurred the expense directly and it is entitled to recover an input tax credit related to that payment.
A reimbursement by an employer to an employee must be fully accounted for as evidenced by supporting vouchers and the amount must have been expended in the course of the employer’s business.
The HST-registered Company may recover the HST by claiming the actual HST paid or based on an authorized tax factor.
9. Is it true that if my business is “large”, I do not receive input tax credits on some of my Company’s purchases?
Yes. In Ontario, from July 1, 2010, until June 30, 2018, large business (generally those making taxable supplies worth more than $10 million annually) will be required to repay or “recapture” the portion of any available input tax credits (ITCs) that is attributable to the provincial part of the HST that becomes payable in respect of a specified property or service that is acquired by a large business for consumption or use by that business in those provinces.
Additionally punitive to large business is the fact that they will not be allowed to simply forego claiming these recaptured ITCs in their calculation of net tax. Instead, they will be required to separately identify any recaptured ITCs in their GST/HST NETFILE returns.
The “specified property or service” generally means a qualifying motor vehicle, energy, a telecommunication service, a meal or entertainment, that is acquired, or brought into Ontario by a large business for consumption or use by that business and fuel (other than diesel) that is acquired by a large business for consumption or use by that business.
10. What are some of the more common input tax credits that auditors disallow?
According to CRA’s response at several Round Table discussions at various conferences, this is a partial list of some of the reasons for denying input tax credits, on audit:
i. Meals and entertainment (Sec 236)
ii. Non-deductible expenses (Sec 170)
iii. ITC claimed over and above the threshold amounts of automotive purchase and leases (Sec 235)
iv. Inadequate / Unsatisfactory documentation (Sec. 169)
v. System Errors and other Errors in Calculating Net Tax
vi. Duplicate & over claiming ITC
vii. ITC on non-commercial activities
viii. ITC on exempt activities
ix. ITC on expenses incurred by non-resident affiliates
x. ITC on Bad Debts (Sec. 231)