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HST Notice #4: Temporary Recapture of Input Tax Credits (ITCs) Requirement

Large business in British Columbia making more than the $10 million threshold in revenue on taxable supplies will be subject to a recapture of the provincial portion of HST Input Tax Credits (ITCs) on “specified property or services”. For companies in BC the provincial portion of HST ITCs is 7%.

In calculating if a company exceeds the $10 million threshold the business must include all the revenue from associated companies of the group. The amount of income earned from the sale of real property (capital property, such as a building or machinery) of the businesses will not be included in calculating the $10 million threshold.

If the threshold amount of a company (or associated group) is in excess of $10 million at the time they become a GST/HST registrant the company will be required to start recapturing ITCs at that time. If a company’s threshold amount increases to above $10 million at the end of a fiscal period ending during the recapture period it will not be required to recapture ITCs until the start of the next recapture period. If a company’s threshold amount decreases to below $10 million during a recapture period it will be required to recapture ITCs until the end of the current recapture period.

The first recapture period is from July 1, 2010 to June 30, 2011 and will continue annually until June 30, 2015, after which it will begin to be phased out completely by June 30, 2018.

Specified property:

Road vehicles

  • A licensed motor vehicle weighing less than 3,000 kg (for comparison a Dodge Ram weighs about 6,600 lbs (or 2,993 kg) and would qualify as specified property). Large trucks (over 3,000 kg) are not subject to ITC recapture.
  • Trailers or semi-trailers are not considered specified road vehicles and do not qualify for the ITC recapture
  • Any parts and service relating to the “specified road vehicle” would be eligible for the ITC recapture
  • Fuel costs for all “specified road vehicles” are subject to ITC recapture. For example, fuel for small trucks and cars would be subject to recapture, while fuel for large trucks (over 3,000 kg) would not be subject to recapture.
  • Companies with many automotive vehicles with some that are “specified” and some that are not, should start tracking fuel costs separately for these two vehicle classes for ITC recapture purposes

Energy

  • Includes electricity, gas & fuel (not including fuel used for automotive equipment as it is included in the cost of “specified road vehicles” above)
  • Energy used directly in the production of tangible personal property for sale is not subject to the ITC recapture
  • Certain business can use a proxy method to determine the amount of energy not subject to ITC recapture, for which the rates are based on the North American Industry Classification System for 2007 (NAICS Canada 2007)
  • Construction and property rental businesses do not fall under one of the eligible categories for the proxy method

Telecommunications

  • Includes local and long-distance telephone service, cable and satellite TV, fax and other data transmission
  • Does not include internet access or web-hosting services
  • If the business receives a single invoice for bundled services (such as cable and internet access) and cannot readily determine the portion not subject to the ITC recapture, the business can use a proxy of 5% as services not subject to the ITC recapture

Meals & entertainment

  • Includes business dinners, tickets to events (theatre, concert, sporting event), private boxes at sporting facilities and admissions to social clubs.
  • Does not include meals used for the purposes of resupply (restaurant), meals and entertainment in relation to a staff function (Christmas party), or meals that are paid to an employee and included as a taxable benefit (per diems).

How to account for Recaptured ITCs

  • The business would claim the gross ITCs (total eligible before any recapture) on their GST/HST Netfile return
  • The amount of recaptured ITCs would be reported in a separate field on the GST/HST return
  • The net amount would be eligible to be claimed as an ITC to offset HST collected on sales

Estimation/Installment Approach

  • Businesses are allowed to use an estimation, installment and reconciliation approach to account for recaptured ITCs.
  • The business must file an election with CRA to use this method
  • Using this approach the business can:
    1. Estimate the amount of ITCs it would be required to recapture for the fiscal year (based on prior year results and future year estimates)
    2. Based on the estimate, make equal installments for the recaptured ITCs in each reporting period (annually, quarterly or monthly)
    3. At the end of the fiscal year, determine the actual amount of ITCs that should be recaptured during the fiscal year and perform a reconciliation between the actual amount and the estimated amounts remitted

If you have any questions or require any additional clarification or assistance on this matter please don’t hesitate to contact us.

Phil Hogan

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The information contained in this article is for general use only and should not be viewed as professional advice. Accounting and tax rules and regulations regularly change and individuals should contact a competent professional to obtain accounting and tax advice based on their specific situation.

Phil Hogan

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