Ontario HST – Restrictions on Input Tax Credits for Large Businesses

Ontario HST – Restrictions on Input Tax Credits for Large Businesses

Temporary Recapture of Input Tax Credits (ITC)

During the initial HST period in Ontario, large businesses and certain financial institutions are required to repay, or recapture, some of the ITCs on certain very specific costs of the provincial component of HST.

This temporary restriction on certain ITCs for large businesses is referred to as the Recapture of Input Tax Credits (RITC).

Businesses subject to the RITC requirement have to separately identify recaptured ITCs on their GST/HST returns and cannot simply forego claiming these ITCs in their calculation of net tax. Therefore, it is necessary to track them separately.

The RITC rates are 100% for the first five years of HST. The RITC requirement will then be phased-out by reducing the rate of recapture in equal increments over the following three years. The ITC recapture rates are:

  • 100% for the period from July 1, 2010 to June 30, 2015;
  • 75% for the period from July 1, 2015 to June 30, 2016;
  • 50% for the period from July 1, 2016 to June 30, 2017;
  • 25% for the period from July 1, 2017 to June 30, 2018; and
  • 0% on or after July 1, 2018.

 Definitions

As defined by the Excise Tax Act (ETA):

Recapture period – a one-year period that:

  1. begins immediately after June 30th of a particular calendar year and ends immediately before July 1st of the following calendar year; and
  2. occurs during the period that the RITC requirement is in effect.

Specified property or service – a road vehicle, fuel used in a road vehicle, energy, a telecommunication service, or a meal or entertainment acquired, or brought into Ontario, by a large business for use by that business in the province.

Large Businesses

In general, only large businesses would be subject to the RITC requirement. For the purposes of the RITC requirement, a business would be considered a large business during a particular recapture period if the business:

  1. is a GST/HST registrant;
  2. has taxable sales made through permanent establishments in Canada greater than $10 million; or
  3. is a financial institution for the purpose of the ETA subject to few exceptions.

A business could be considered a large business even if it does not have a permanent establishment in Ontario.

There are similar rules for partnerships and joint ventures, and their members.  ITCs on an allowance or a reimbursement to an employee or a partner are also covered by RITC rules for large businesses.

Changes in Status During a Recapture Period

If a business that is not a large business at the beginning of a recapture period has a fiscal year end during that period and its RITC threshold amount exceeds $10 million, the business would generally not become a large business until the beginning of the next recapture period.

Conversely, if a large has a fiscal year end during a recapture period and its RITC threshold amount falls below $10 million at that point, the business would generally continue to be a large business until the end of that recapture period.

There are some special rules in regards to the timing of the requirement to begin RITC for mergers and amalgamations during the year.

Specified Property and Services

The RITC requirement generally applies to specified property and services acquired or brought into Ontario by a large business for use by that business within the province. Property and services acquired in Ontario for use outside the province would generally not be subject to the RITC requirement.

In general, specified property and services would include:

  1. specified road vehicles, including certain vehicle parts and services, and motive fuel (other than diesel fuel) for use in specified road vehicles;
  2. specified energy;
  3. specified telecommunication services; and
  4. specified meals and entertainment currently subject to an ITC repayment requirement under the ETA, generally at a 50% repayment rate.

However, the RITC requirement would generally not apply to:

  • specified property acquired by a large business for the sole purpose of being re-supplied by that business;
  • specified property acquired by a large business for the sole purpose of it becoming a component part of tangible personal property that is to be supplied by that business; or
  • specified services acquired by a large business for the sole purpose of being resupplied by that business.

Click here for a more detailed description of the specified property and services.

When to Account for Recaptured ITCs

A large business is required to account for RITCs in its GST/HST return for the reporting period in which the provincial component of the HST, to which the ITCs relate, first becomes payable.

Transitional Measure

If a large business is the recipient of a supply of a specified property or service, and the consideration for the supply first becomes due, or is paid, after October 14, 2009 and before May 2010, then to the extent that the specified property is delivered, and ownership of the property is transferred to the large business on or after July 1, 2010, or at least 10% of the specified service is performed on or after July 1, 2010.

In this case, the large business would generally be required to self-assess the restricted provincial component of the HST in respect of that property or part of the service either in the GST/HST return for the reporting period of the large business that includes July 1, 2010, if the due date for that return is before November 2010, or in any other case, in prescribed form and before November 2010.

How to Account for Recaptured ITCs

Large businesses are required to calculate and report their ITCs on the GST/HST return.  A large business completes the GST/HST return in the following manner:

  • Report the amount of the “gross” ITCs in a separate information field on a schedule to the GST/HST return. “Gross” ITCs are the ITCs and adjustments a GST/HST registrant is entitled to claim before taking into account any RITC adjustments.
  • Report the amount of RITCs in separate information fields on the schedule: one field for RITCs for the provincial portion of the HST in Ontario, and another field for British Columbia.
  • Calculate and report the net amount of ITCs, which is the gross ITCs less the RITCs, in an information field on the schedule. This net amount is eligible to be claimed as an ITC in the GST/HST return in the “Total ITCs and Adjustments” field.

Generally, if a registrant fails to report recaptured ITCs in the appropriate reporting period, any subsequent reporting of the recaptured ITCs would be done through an amended return for that period.

It is important to note large businesses are not allowed to forego claiming ITCs in order to fulfill the RITC requirement. Failing to recapture ITCs could result in penalties.

Filing GST/HST Returns

A GST/HST return must be electronically filed for all reporting periods, if the annual taxable revenue is greater than $1.5 million.

Option to Use an Estimation/Installment Approach

In order to help simplify compliance with the RITC requirement, a large business would generally be allowed to make an election to use an estimation, installment and reconciliation approach to accounting for recaptured ITCs (Estimation/Installment Approach). The election would be filed with CRA within three months after the end of a large business’s fiscal year and would apply for at least one year.  Large businesses would, before the introduction of the HST in Ontario on July 1, 2010, generally be able to elect to use the Estimation/Installment Approach.

Using the Estimation/Installment Approach, for each province that has an RITC requirement, a large business would:

  • estimate the amount of ITCs it would be required to recapture during a fiscal year;
  • make equal installment payments of recaptured ITCs in each reporting period during a one-year period based on this estimate,; and
  • determine the actual amount of ITCs it should have recaptured during that year and reconcile any differences between the estimated and actual amounts at the end of the fiscal year.

Large business still have to identify the specified property and services it acquires or brings into a province in such a way that it could determine the actual amount of available ITCs that are subject to the RITC requirement. However, this approach allows a large business to account for these recaptured ITCs annually and on the basis of aggregate financial information.

Method of Estimation/Installment

 Step 1: Estimation

At the beginning of a fiscal year, a large business that has filed the election would estimate the amount of ITCs it would be required to recapture, for each province with an RITC requirement, during that fiscal year (Estimated RITCs). This estimate would be based on:

  • ITCs it would have been required to recapture during its most recently completed fiscal year, if the RITC requirement had been in place throughout that year; and
  • any additional ITCs it would be required to recapture in its current fiscal year because of anticipated changes in circumstances from its previous fiscal year.

A large business would not be allowed to use an Estimated RITCs amount that is less than the actual amount of the business’s previous fiscal year’s RITCs; however, it could use a greater amount.

Step 2:  Installment

A large business using the Estimation/ Installment Approach is required to report its Estimated RITCs over the course of a year-long period beginning three months after the beginning of its fiscal year and ending three months after. This is called the Installment Period.

To determine the amount of RITCs that must be reported during the Installment Period, a large business would divide the relevant Estimated RITC amount by the number of GST/HST reporting periods in the Installment Period (e.g., a monthly filer would divide the amount by 12). The equal installment amounts would be reported in the business’s GST/HST return as RITCs for each reporting period in the particular Installment Period.

Step 3: Reconciliation

After the end of its fiscal year, a large business using the Estimation/Installment Approach would review its financial records and determine the actual amount of ITCs it would have been required to recapture, for each province with an RITC requirement, if the RITC requirement had been in effect throughout that year. These are referred to as Actual RITCs.

The Actual RITCs amount would be compared to the Estimated RITCs amount for the same fiscal year. The business would report any differences between these two amounts in its GST/HST return.

Some Special Cases

Specified Members of a Qualifying Group

If a large business is a specified member of a qualifying group of closely related persons that has made an election for nil consideration under the ETA, and that large business acquires a specified property or service from another specified member of the same qualifying group, the large business would, under the RITC requirement, generally be required to account for the provincial portion of ITCs available with respect to that acquisition of the specified property or service.

Non-Arm’s Length Transactions

If a supply of a specified property or service is made between persons who are not dealing with each other at arm’s length for purposes of the ETA for no consideration, or for consideration less than fair market value, the recipient of the supply (if it is a large business) would generally be required to recapture ITCs as if the supply had been made at fair market value.

Anti-avoidance

Large businesses that fail to account for recaptured ITCs in the proper manner would generally be subject to penalties.