What does the end to limitations for large companies in obtaining ITCs/ITRs imply?
Until recently, large businesses were subject to limitations in obtaining input tax credits (“ITCs”) and input tax refunds (“ITRs”) in respect of certain expenses in Quebec, Ontario and Prince Edward Island.
These limitations were phased out at different rates in these three provinces, but overall the phase-out by province began on July 1, 2015 and is now complete as of April 1, 2021. The end of special treatment for large businesses does not mean that there are no longer limitations in obtaining an ITC/ITR. The Excise Tax Act and the Quebec Sales Tax Act provide for several limitations and restrictions to ITCs/ITRs that apply to SMEs as well as to large businesses and are to be reminded.
Goods and Services Tax/Harmonized Sales Tax (“GST/HST”) and Quebec Sales Tax (“QST”) registrants generally pay GST/HST and Quebec Sales Tax (“QST”) in Quebec on their taxable purchases or acquisitions of property and services and claim ITCs and ITRs for the tax paid or payable on business inputs related to making taxable supplies.
Specificities of large companies
Quebec had an ITR regime for large businesses with a three-year phase-out period from January 1, 2018 to December 31, 2020. The provinces of Ontario and Prince Edward Island had an ITC recapture (“ITCR”) system in place for their provincial component of the HST. In Ontario, the ITCRs phase-out period ran from July 1, 2015 to June 30, 2018. For Prince Edward Island, the phase-out period for ITCRs was from April 1, 2018 to March 31, 2021.
Large businesses are generally those with taxable and zero-rated revenues in excess of $10 million in their last fiscal year. The threshold amount is calculated by including the revenues earned by the business and its associated businesses.
A registrant may claim ITCs and ITRs in respect of the GST and QST paid on a passenger vehicle acquired as capital property in the course of commercial activities.
A passenger vehicle is a motor vehicle designed to be mainly used to carry a maximum of eight persons (excluding the driver). However, the definition of an automobile excludes a van or a pickup truck of maximum three seats and mainly used to transport goods in the course of a business.
A registrant who acquires such a vehicle will be limited in the calculation of his ITC and ITR to a value not exceeding $30,000, before GST/HST and QST. This limit is increased to $55,000 before GST/HST and QST, for zero-emission vehicles.
A registrant who leases a passenger vehicle will also be limited in the calculation of the ITC and ITR to a value not exceeding $800 per month, before GST/HST and QST. According to our research, the limit for zero-emission vehicle leases has not been increased compared to the limit for regular passenger vehicles.
Meals and entertainment
ITCs and ITRs are limited to 50% of the GST and QST paid in respect of food, beverages and entertainment expenses incurred by a registrant in commercial activities. Entertainment expenses include tickets to an event or concert as well as sports box fees.
However, there are exceptions to this 50% limitation, including for food, beverage and entertainment expenses primarily in the following situations:
- They are purchased for re-supply by some companies;
- They are purchased through charity fundraisers;
- They are expenses for which a specific payment is received;
- They are included in the calculation of an employee’s income (i.e., a taxable benefit); and
- They relate to one of up to six special events held in a calendar year to which all employees are invited (e.g., annual festivals, Christmas party).
Please note that membership fees for an association, the purpose of which is to provide facilities for recreation, sport or dining, such as a golf club, are not eligible for ITCs and ITRs.
The abolition of the large business limitation does not mean that there is no longer a limit on road vehicles, nor a 50% limit on food, beverage and entertainment expenses.
It should also be remembered that GST/HST and QST registrants are entitled to an ITC/ITR in respect of the GST/HST and QST paid only to the extent that they incurred the expense in the course of their commercial activities, which excludes supplies of exempt property and services. In addition, registrants must have the prescribed documentation.
Remember the following:
- The registrant who acquires a car must calculate their ITCs and ITRs based on the $30,000 threshold and $55,000 threshold for zero-emission cars.
- The threshold is $800 per month for car rental.
- A registrant may only claim 50% of the GST and QST paid on food, beverages and entertainment expenses, except for the exceptions listed above.
- There are no ITCs or ITRs for sports or recreation facility memberships.
- To date, restriction for large businesses have been eliminated in the provinces of Quebec, Ontario and Prince Edward Island.
For more information, please directly contact Pierre Nadeau, Senior Manager – Indirect Taxes, or your Mazars advisor.
The Tax News published by Mazars provides tax information and facts. It is not intended to provide tax or professional advice of any kind. Readers are advised to consult with their own competent advisors and to obtain advice from them that takes into account their particular situation.