Tax Articles
Preparing for the HST – Restricted Input Tax Credits
Laura McGuckin
May 14, 2010
Effective July 1, 2010, Ontario’s Retail Sales Tax will be replaced with the HST. The HST will have a rate of 13% - which is a combination of a 5% federal portion and an 8% provincial portion. As part of the transition to the HST, a temporary restriction has been placed on input tax credits (ITCs) that would apply to certain items used by large business in the course of their commercial activities (both taxable and zero-rated supplies).
Who does this apply to?
The restriction on ITCs applies to the Ontario portion of the HST only. The federal portion of the HST will still be eligible for full recovery as an ITC.
The temporary restriction on ITCs applies to:
- Large Businesses – Generally those making taxable supplies (including zero-rated supplies) of more than $10 million annually. If a business is associated with other GST/HST registrants, the combined revenue from taxable supplies of the associated group will be considered in determining if the ITC restriction applies. If your total revenue falls below $10 million in a fiscal year, you will no longer be considered to be a large business effective the July 1st that occurs after your fiscal year end and will no longer subject to the recapture requirement after July 1st. Similarly, if your total revenue from taxable and zero-rated supplies rises above $10 million in a fiscal year, you will become a large business effective the July 1st following your year end and be required to recapture certain ITCs after July 1st. Amalgamations and business acquisitions may also impact your large business status.
- Certain Financial Institutions or persons related to financial institutions – Includes banks, trust companies, credit unions, insurers, segregated funds of insurer and investment plans.
The recapture requirement does not apply to:
- Public Service Bodies (i.e. municipalities, hospital authorities, universities, public colleges, school authorities, charities and non-profit organizations).
- Items acquired for use in farming activities by a person whose chief source of income is farming.
What items are restricted?
The restriction applies to the provincial component of the HST paid when the following goods and services are acquired or brought into Ontario for use by a large business:
Specified Road Vehicles
A specified road vehicle is a vehicle weighing less than 3,000 kg that must be registered for use on public highways. This includes vehicles acquired by way of sale or lease. Trailers, semi-trailers or detachable axles are not considered specified road vehicles.
If a large business acquires a specified road vehicle for resale but uses that vehicle before it is resupplied (i.e. as a demo), the business will have to recapture a portion of the provincial portion of the ITC. The amount to be recaptured will be 8% x 2% x the cost of the vehicle for each month that the vehicle is used as a demonstration vehicle.
Parts and Services for Specified Road Vehicles
Includes vehicle parts and services in respect of a specified road vehicle that were acquired within 12 months of the acquisition of the vehicle. This does not include regular repair and maintenance of specified vehicles.
Fuel for Specified Road Vehicles
Fuel (other than diesel fuel) used in any specified road vehicle (regardless of the date the vehicle was purchased).
Specified Energy
Generally includes electricity, gas, fuel and steam that is acquired or brought into Ontario for use by a large business.
The recapture requirement does not apply when the energy is used directly in the production of tangible personal property for sale or in the production of equipment used by the business in the production of tangible personal property for sale. Production generally means the assembling, processing or manufacturing of tangible personal property that is different from the original property by its nature or characteristics.
For example, a business that produces a part for sale has a production facility in Ontario. The recapture requirement would not apply to the portion of the electricity used in the production facility to directly produce the part but it would apply to the portion of the electricity used to provide light, heating, air conditioning, operate a security system, etc. To simplify compliance, large businesses producing tangible personal property for sale can elect to use a production proxy to determine what portion of the energy acquired was used directly in the production of tangible personal property for sale. These proxy rates are available from the CRA.
The recapture requirement does not apply to energy used by a large business directly in activities that are eligible scientific research and experimental development. The company must be eligible for and actually make a claim for SR&ED expenditure or investment tax credits in their tax return for that year. A proxy method is also available to simply compliance.
Specified Telecommunication Services
Includes services such as local and long-distance telephone, cable and pay television, satellite television, facsimile and e-mail, video, audio and computer link-ups and data transmission, but does not include internet access service, web-site hosting services and toll-free numbers. A proxy method is also available to aid in compliance when specified and non-specified telecommunication services are invoiced on the same bill.
Meals and Entertainment
Includes food and beverages for human consumption and entertainment. Does not include meals or entertainment acquired solely for resupply (i.e. a restaurant or airline), acquired for certain events where all employees from a particular location are invited (i.e. Christmas party) and where the meals and entertainment are included in the employee’s income as a taxable benefit.
How long will the restrictions apply?
The ITC restriction will apply to the Ontario portion of the HST at the following rates for the following time periods:
- 100% from July 1, 2010 to June 30, 2015
- 75% from July 1, 2015 to June 30, 2016
- 50% from July 1, 2016 to June 30, 2017
- 25% from July 1, 2017 to June 30, 2018
- 0% after July 1, 2018
Reporting the restricted ITCs
Persons subject to the restriction will be required to electronically file their GST/HST return using the CRA’s GST/HST NETFILE service. This is a free internet-based service.
The gross ITCs will be reported on the NETFILE return. Gross ITCs are the full ITCs a registrant is entitled to claim before taking into account any ITC recapture and restrictions. The ITCs that are to be recaptured are then reported on a separate schedule. The net amount of ITCs will then be calculated as the difference between the gross ITCs and the recaptured ITCs and this amount will be used in completing the GST/HST return.
Recordkeeping
Because of the requirement to report the gross amount of the ITCs and the recaptured amounts separately, businesses will need to ensure that their accounting systems appropriately track the HST paid on the specified items. Also important to remember when designing your accounting system is that the recapture requirement only applies to the Ontario portion of the HST.
There are many different approaches to tracking the recaptured HST. You may wish to set up a separate HST general ledger account to track all HST paid on specified items. Then when it is time to prepare the HST return for a particular period, you can reallocate 5/13 of the balance to the regular GST/HST account and the balance in this new account will be the amount subject to recapture. Alternatively, you could separate the federal and Ontario portion of the HST at the time the purchase invoices are recorded with the Ontario potion going to a separate general ledger account.
Alternatively, the CRA has made available an estimation, installment and reconciliation approach which large businesses may elect to use. Using this approach a business would make an estimate of the amount of ITCs it will be required to recapture during a fiscal year and based on this estimate, make equal installment payments of recaptured ITCs in each reporting period over the next year. At the end of the fiscal year, the business will still have to determine the actual amount of ITCs it should have recaptured during the year and reconcile any differences between the actual amount and the estimate. The reconciliation must be done within 3 months of the fiscal year end. This approach does not exempt a large business from tracking the specified goods and services but allows them to account for these services on an annual basis and on the basis of aggregate financial information. The election must be filed with the CRA after the end of a large business’s fiscal year and would apply for at least one year.
If you would like assistance setting up your accounting system to track the restricted portion of HST, please contact you BDO advisor.
Sources and Additional Resources
For more information, please see the following:
Ontario Tax Tips: Prepare for Ontario’s HST: #1 – Restricted Input Tax Credits
Ministry of Revenue Information Notice #5: Temporary Recapture of Input Tax Credits Requirement
The information in this publication is current as of May 14, 2010.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
