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 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. Let’s get it right now – and avoid the penalties and the stress.
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.
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.
Common issues with RITC requirements
Since the RITC rules were introduced, many businesses have faced the following common issues:
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 businesses; 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 HST 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. Large businesses should understand how these and other special RITC rules and exceptions apply to their operations.
Accounting for RITCs
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.
Hope this helps you avoid any pitfalls in 2014. All the best for a profitable year.