Canada: Government Can Impose Penalties On Large Businesses For Deficiently Reporting Recapture Of Input Tax Credits ("ITCs")

Last Updated: September 24 2015
Article by Jamie M. Wilks and Carl Irvine

Generally, "large businesses"1 are subject to the recapture of their ITCs relating to theOntario and Prince Edward Island ("PEI") portion of the HST ("PVAT") payable in respect of certain categories of property and services acquired or imported (the "Prescribed Property" and "Services").2 However, many businesses are not aware that they can be subject to potentially significant penalties for failing to report such recapture, even when no ITCs were claimed!

Timing of PVAT ITC Recapture

Excluding financial institutions, large businesses are generally monthly GST/HST filers. A monthly filer is generally required to report its PVAT ITC recapture either:


on the GST/HST return for the month in which the HST becomes payable, or


on its next monthly return.

There are exceptions to the above. Of note, special timing rules apply to food, beverages and/or entertainment expenses that are subject to 50% income tax deductibility and ITC eligibility restrictions (one of the categories of Prescribed Property and Services). Where a large business chooses to defer the 50% limitation on such ITC claims to the first monthly GST/HST return following the fiscal year in which the ITCs were claimed, then the PVAT ITC recapture (relating to the 50% of the ITCs allowed) should occur on this same return.

Penalties for Failing to Accurately Report PVAT ITC Recapture

If a large business fails to report PVAT ITC recapture (or to do so correctly), then CRA can impose penalties. The penalty is calculated as 5% of the unreported or under-reported amount of the PVAT ITC recapture, plus 1% of such amount for each complete month, not exceeding 5 months, that the appropriate PVAT ITC recapture goes unreported. A delinquency of 5 or more months would result in the maximum penalty of 10% of the unreported or under- reported amount.

Even if a large business did not actually claim the ITCs available for Prescribed Property or Services acquired or imported, such that the business did not receive any financial benefit from its failure to recapture the appropriate portion of the ITCs (and the government suffered no financial disadvantage), these penalties could still be imposed. To add insult to injury, the business would generally be restricted from deducting the penalties from its income for Canadian income tax purposes.

Traps for the Unwary

Where no HST was actually payable on an acquisition or importation of Prescribed Property or Services, PVAT ITC recapture may arise. For example, the import of Prescribed Property or Services into Ontario or PEI by a GST/HST-registered large business, exclusively for consumption, use or supply in the importer's taxable commercial activity, may not give rise to HST, but could nevertheless trigger PVAT ITC recapture. For this reason, large businesses need to be alert to the possibility of PVAT ITC recapture relating to Prescribed Property or Services entering Ontario (or PEI) on a HST-free basis.

Correcting Deficient Reporting of ITC Recapture

If a GST/HST registrant fails to report, or incorrectly reports, recaptured ITCs and wishes to correct any such error, then the registrant generally has two options to do so:


send a letter to the registrant's local Canada Revenue Agency ("CRA") tax services office explaining the nature of the error(s) and requesting that the appropriate adjustment(s) be made to correct the error(s); or


adjust the registant's GST/HST return(s) electronically under the "Adjust a return" option of the My Business Account portal (assuming that the registrant is enrolled or enrols to use that portal).

In certain cases, where the penalty amount is significant, a delinquent large business should consider making a GST/HST voluntary disclosure to CRA to seek a waiver of the penalties.

The Bottom-Line

Regardless of whether the government suffers any revenue loss from the filing deficiencies, the government can impose penalties for the errors (that are non-deductible for Canadian income tax purposes). In the government's view, the maxim "no harm, no foul" has no application to revenue neutral GST/HST filing errors made by large businesses, so large businesses need to be diligent in their compliance relating to the recapture of PVAT ITCs. Changes to the rules should be monitored. Of note, as we explained in our July 2015 Bulletin, the PVAT ITC recapture rate is being incrementally phased-out between July 1, 2015 and July 1, 2018 in Ontario.3

1 Generally, a person whose annual taxable supplies made in Canada (or made outside Canada through a permanent establishment in Canada) exceed $10 million is a "large business". This threshold is calculated with reference to taxable supplies made by any associated persons. Irrespective of whether this $10 million threshold is exceeded, certain financial institutions are large businesses, if they are registrants. Public service bodies, as defined, and certain government entities are not considered large businesses.

2 Prescribed Property and Services include motor vehicles for use on public roads (excluding for re-sale or lease), motor fuel for such vehicles, specified energy, certain telecommunication services, and food, beverages and entertainment that, on acquisition, are restricted to 50% income tax deductibility and ITCs.

3 In this regard, refer to our Bulletin, Reduction of ITC Recapture Rate for Ontario Portion of HST ("OHST") Starting July 1, 2015.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2015

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

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

Jamie M. Wilks
Carl Irvine
In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.