An Update On Recaptured Input Tax Credits
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Restricted Input Tax Credits
The recaptured input tax credit (RITC) rules were introduced with the Ontario and British Columbia Harmonized Sales Tax (HST) on July 1, 2010. Canada Revenue Agency (CRA) has started to audit businesses’ compliance with these rules.
As noted in a previous memorandum, large business and certain financial institutions are required to repay or “recapture” the provincial component of the HST claimed as input tax credits (ITCs). The recapture applies to telecommunications, energy, meals and entertainment and some road vehicles.
The RITC rules apply to Ontario and Prince Edward Island and applied to British Columbia until March 31, 2013. These rules mean that a large business must recapture ITCs, even if the ITCs have not been claimed, and identify the amounts separately on its HST return.
In Ontario, corporations are required to repay the provincial component of the HST at the following rates:
- 100% July 1, 2010 – June 30, 2015
- 75% July 1, 2015 – June 30, 2016
- 50% July 1, 2016 – June 30, 2017
- 25% July 1, 2017 – June 30, 2018
- 0% Thereafter
The P.E.I. HST which became effective April 1, 2013 also includes RITC rules with a similar five year period and a three year phase-out period.
I’m Quebec, there are similar restrictions in regards to the recovery of Quebec Sales Tax (QST) by QST registered large businesses. The 2015/2016 Quebec budget confirmed that restriction will also be phased out in equal increments of 25 % over three years commencing on January 1, 2018.
Common Problems with RITC
Large Business – Defined
The RITC rules define a large business as one that has taxable sales (including associated entities) of greater than $10 million. This threshold is based on the previous fiscal year.
Some common errors in determining the $10 million threshold are:
- Ignoring sales of associated entities;
- Ignoring sales made outside Canada by a permanent establishment in Canada;
- Not determining that an entity is associated for GST purposes;
- RITC rules not applied to new entity of an associated group;
- RITC rules not considered on merger or amalgamation transactions.
Specified Goods and Services
As noted above, the RITC rules apply to telecommunications, energy, meals and entertainment and some road vehicles. These are specific rules and exceptions for each of the specified goods and services. Businesses should review and evaluate their handling of the RITC rules to determine if any corrective measures are required.
The following list outlines some issues that should be considered when applying the RITC rules:
- Calculating the portion of energy that is subject to the RITC rules;
- Applying RITC rules to leased vehicles;
- Applying RITC rules to fuel, parts and services used in qualifying motor vehicles;
- Applying RITC rules to energy or telecommunication services that are included in lease payments of real property;
- Employee expense accounts and the RITC rules.
Other Issues
- Business may elect to use the proxy method for specified energy. Has the election been filed with CRA? If election filed, is the business applying the correct proxy code?
- Required to self-assess for intra-Canada “supplies”;
- Ability to elect to use the estimation/instalment method;
- Dealing with associated entities and transactions involving specified goods and services;
- When filing GST/HST returns, must separately identify RITC amounts;
- CRA applies special penalty for failure to meet RITC requirements.
For more information about income tax credits and tax services contact the experienced accounting professionals at Hogg, Shain & Scheck.