Canada: Restricted Input Tax Credits

Last Updated: October 27 2014
Article by Rosa Iuliano

The Harmonized Sales Tax (HST) was introduced in Ontario on July 1, 2010, bringing about changes for many businesses. Most notably, it introduced a requirement that "large businesses" be required to repay or "recapture" the portion of any available input tax credits (ITCs) attributable to the provincial portion of the HST that becomes payable, or is paid without having become payable, in respect of a specified property or service that is acquired. 

At the time of introduction, many businesses were able to identify themselves as meeting the criteria of a "large business." But since that time, how many more have possibly grown their businesses, expanded their sales, made acquisitions, or changed their corporate structures such that their associated group structures now meet the definition? How many other businesses have expanded their operations into Ontario?

For purposes of the Restricted Input Tax Credits (RITC) requirement, a person is considered to be a large business during a particular recapture period if the person is a GST/HST registrant and the person's RITC threshold amount for that recapture period is greater than $10 million, or the person is a financial institution.

The definition of the threshold amount is quite long and convoluted. Simply put, it is the total of all consideration for taxable supplies made in or outside of Canada in the last recapture period, as well as the supplies of all associated corporations, including any inter-company transactions, with rules in place to account for short years. 

What is restricted?

In general, specified property and services include:

  • qualifying motor vehicles, including certain vehicle parts and services, and in Ontario, motive fuel (other than diesel fuel) for use in motor vehicles;
  • specified energy;
  • specified telecommunication services; and
  • specified meals and entertainment that are currently subject to an ITC repayment requirement of 50 per cent under the Excise Tax Act.

However, the RITC requirement generally would not apply to the following specified property and services:

  • specified property acquired by a large business for the sole purpose of being resupplied by that large business (i.e., by way of sale, or by way of lease, license or similar arrangement);
  • specified property acquired by a large business for the sole purpose of it becoming a component part of other tangible personal property that is to be supplied by the large business; or
  • a specified service that is acquired by a large business for the sole purpose of being resupplied by that business.

Persons subject to the RITC requirement may not simply forgo claiming these recaptured ITCs in their calculation of net tax, but are required to separately identify any recaptured ITCs in their GST/HST NETFILE returns. Large businesses that fail to account for RITCs in the proper manner will be subject to penalties.

"Recapture period" means a one year period that (a) begins immediately after June 30 of a particular calendar year and ends immediately before July 1 of the following calendar year, and (b) occurs during the period that the RITC requirement is in effect (i.e., during the period on or after July 1, 2010, and before July 1, 2018).

The rates of recapture will be 100 per cent for the first five years that the HST is in effect, and will be phased out by reducing the rate of recapture in equal increments over the following three years. The ITC recapture rates will be as follows:

Period

ITC Recapture Rates

July 1, 2010, to June 30, 2015

100%

July 1, 2015, to June 30, 2016

75%

July 1, 2016, to June 30, 2017

50%

July 1, 2017, to June 30, 2018

25%

On or after July 1, 2018

0%

If a person that is not a large business at the beginning of a particular recapture period has a fiscal year-end during that recapture period, and its threshold amount exceeds $10 million at that point, the person generally will not be considered a large business until the beginning of the next recapture period. 

Conversely, if a person that is a large business at the beginning of a particular recapture period has a fiscal year-end during that recapture period, and its threshold amount is below $10 million at that point, the person generally will continue to be considered a large business until the end of that recapture period. It is important to revisit these criteria annually during tax filings to ensure compliance, particularly for businesses near the threshold amount.

Accounting for RITCs

Where a large business purchases specified property or services and pays HST in a province with ITC restrictions, it must ensure that it has a system in place to account for the required recapture of the provincial component of the HST paid on those purchases. The amount of the recaptured HST input tax credits must be reported separately. 

As a first step, a large business should use different general ledger accounts for tracking the provincial portion of the HST paid in the province that must be recaptured. The business is required to account for RITCs in its GST/HST return for the reporting period in which the ITCs first become available – that is, in the first reporting period in which the provincial component of the HST to which the input tax credits relate becomes payable or is paid without having become payable.

Penalties

Significant penalties may apply for failing to properly account for recaptured ITCs in the proper reporting period. Under Regulation SOR /2010-150 Electronic Filing and Provisions of Information (GST/HST) Regulations – section 7, any failure to correctly report the required recapture amount in a particular reporting period may result in a base penalty equal to five per cent of the difference between the amount that was required to be reported and the misstated amount. In addition, a further one per cent penalty may be applied for every complete month that the recapture amount remains misreported, to a maximum of five months, prior to the error being brought to the attention of the Canada Revenue Agency (CRA) or the misreported amount being included in an assessment of net tax for the reporting period in question. Essentially, within six months, any failure to report a recapture amount in the proper reporting period, or an error that misstates the amount of recapture in a particular reporting period, could result in a penalty equal to ten per cent of the under-reported amount.

Further, once a particular recapture error or omission has been identified for a particular reporting period, similar errors in subsequent periods could conceivably be eligible for the gross negligence penalty.

The CRA has indicated that a large business may correct any improperly reported recaptured ITCs for a particular reporting period by sending a letter to its local tax centre requesting that its GST/HST return for the period in question be adjusted to report the correct recapture amount.

The province of Ontario has been under the HST regime for more than four years now. The intricacies of dealing with restricted supplies and understanding what is and what isn't included in the definition, including methodologies to minimize the tax impact of these restrictions, require the assistance of specialists in the area of the HST.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Rosa Iuliano
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions