Harmonized Sales Tax – Temporary Recapture of Input Tax Credits in Ontario and British Columbia

GST/HST Technical Information Bulletin B-104
June 2010

Table of contents

• Overview
  • Interpretation
• Large businesses
  • The RITC threshold amount
  • Changes during a recapture period.
• Specified property and services
  • Qualifying motor vehicles
    • Parts and services
    • Use of qualifying motor vehicles before resupply
    • Fuel for use in qualifying motor vehicles in Ontario
  • Specified energy
    • Production for sale
    • Production and production equipment
    • Production proxy
    • Scientific research and experimental development (SR&ED) activities and the SR&ED proxy
    • Ordered application of proxies to specified energy
  • Specified telecommunication services
    • Proxies for specified telecommunication services
  • Specified meals and entertainment
    • Meal expenses for long-haul truck drivers
• Special cases
  • Specified property and services brought into Ontario and British Columbia
  • Specified members of a qualifying group
  • Non-arm’s length transactions
  • Fuel acquired in or brought into British Columbia for use as specified energy
  • Specified property or services supplied by the operator of a joint venture
  • Allowances and reimbursements
  • Deduction from net tax – for qualifying motor vehicles sold or removed from the province
• Accounting for recaptured ITCs
  • When to account for recaptured ITCs
    • Exception
    • Transitional measure
  • How to account for recaptured ITCs on the GST/HST NETFILE return
  • How to adjust GST/HST returns for misreported recaptured ITCs
  • Option to use an Estimation/Reconciliation Method for accounting of RITCs
    • Step 1:  Estimation
    • Step 2:  Reporting Estimated RITC amounts
    • Step 3:  Reconciliation
    • Estimating RITCs where the RITC requirement has been in effect less than one year
    • Reconciliation for the 2011 fiscal year, estimation, and reporting RITC amounts for the 2012 fiscal year
    • Estimation/Reconciliation Method – 2015 fiscal year
    • 2016 fiscal year
    • The last recapture period ending June 30, 2018
  • Estimation/Reconciliation Method – special cases
    • Large business at the time of GST/HST registration
    • Estimated RITCs based on a prior short fiscal year
    • When a large business ceases to be registered for GST/HST purposes

Overview

The Government of Ontario and the Government of British Columbia are each introducing a harmonized sales tax (HST) which will come into effect on July 1, 2010. The HST rate in Ontario will be 13% of which 5% will represent the federal part and 8% the provincial part. The HST rate in British Columbia will be 12% of which 5% will represent the federal part and 7% the provincial part.

From July 1, 2010, until June 30, 2018, with the introduction of the HST in Ontario and British Columbia, large businesses – generally those making taxable supplies worth more than $10 million annually, and certain specified financial institutions – will be required to repay or "recapture" the portion of any available input tax credits (ITCs) that is attributable to the provincial part of the HST that becomes payable, or is paid without having become payable, in respect of a specified property or service that is acquired, or brought into one of these provinces, by a large business for consumption or use by that business in those provinces.

Persons subject to the RITC requirement will not be allowed to simply forego claiming these recaptured ITCs in their calculation of net tax. Instead, they will be required to separately identify any recaptured ITCs in their GST/HST NETFILE returns. It is important to note that, in this particular respect, the RITC requirement will be different from the existing restriction on ITRs in Quebec.

The rate of ITC recapture will be 100% for the first five years that the HST is in effect in Ontario and British Columbia. 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 will be as follows:

Interpretation

Unless otherwise noted, the terms and concepts used in this bulletin generally have the same meaning as they do for the purposes of Part IX of the Act. In addition, the following terms have the following meanings:

• "recapture period" means a one-year period that (a) begins immediately after June 30 of a particular calendar year and ends immediately before July 1 of the following calendar year, and (b) occurs during the period that the RITC requirement is in effect (i.e., during the period on or after July 1, 2010 and before July 1, 2018); and
• "specified property or service" generally means a qualifying motor vehicle, energy, a telecommunication service, a meal or entertainment, that is acquired, or brought into Ontario or British Columbia, by a large business for consumption or use by that business in those provinces, and for Ontario only, fuel (other than diesel) that is acquired or brought into Ontario by a large business for consumption or use by that business in Ontario. The particular circumstances in which the RITC requirement will apply to specified property and services are described in other parts of this bulletin.

Large businesses

In general, only a person that is considered to be a large business will be subject to the RITC requirement. For the purposes of the RITC requirement, a person is considered to be a large business during a particular recapture period if the person is a GST/HST registrant and:

• the person’s RITC threshold amount (which is explained below under the heading The RITC Threshold Amount) for that recapture period is greater than $10 million, or
• the person is one of the following financial institutions (other than a selected listed financial institution), or a person that is related (for purposes of the Act) to one of the following financial institutions (hereafter a "specified financial institution"):  a bank; a corporation that is licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as a trustee; a credit union; an insurer or any other person whose principal business is providing insurance under insurance policies; a segregated fund of an insurer; an investment plan or the Canada Deposit Insurance Corporation.

A selected listed financial institution will not be considered a large business.

A person that otherwise meets the criteria would be considered to be a large business regardless of whether the person has a permanent establishment in Ontario or British Columbia.

A public service body will not be considered to be a large business. Similarly, a person whose chief source of income is farming, as defined in the federal Income Tax Act, will generally not be considered to be a large business to the extent that the person is acquiring, or bringing into Ontario or British Columbia, a specified property or service for use or consumption in farming activities.

The following government entities will not be considered large businesses:

• An entity of the government of Canada that is not listed in Schedule I of the Federal Provincial Fiscal Arrangement Act,
• a department (as defined in section 2 of the Financial Administration Act) or
• an entity of the government of a province, that is eligible, pursuant to a provision of a sales tax harmonization agreement with that province, for a rebate of the GST/HST.

If a partnership is a large business and a member of the partnership (other than an individual) acquires, or brings into Ontario or British Columbia, a specified property or service for use in one of these provinces, and that use is in respect of the activities of the partnership (but not on account of the partnership), the member will generally be considered to be a large business in respect of that acquisition or bringing in, if at that time, the member is a GST/HST registrant.

If a participant in a joint venture is a large business that has made a joint venture election with the operator of the joint venture, and the operator acquires, or brings into Ontario or British Columbia, a specified property or service on behalf of the participant for consumption or use in one of these provinces, the operator will generally be considered to be a large business in respect of that acquisition or bringing in.

The RITC threshold amount

For the purposes of determining whether a particular person is a large business for a particular recapture period, the RITC threshold amount of the person for that particular recapture period will include the following amounts:

1. the total of all consideration for taxable supplies made in Canada, or outside Canada through a permanent establishment in Canada, by the person that became due, or was paid without having become due, in the last fiscal year of the person that ended before the recapture period;
2. the total of all consideration for taxable supplies made in Canada, or outside Canada through a permanent establishment in Canada, by a GST/HST registrant that is associated (for purposes of the Act) with the particular person, that became due, or was paid without having become due, in the last fiscal year of the associated person that ended before the recapture period, and
3. where, at any time in the 12-month period before the recapture period, the particular person purchased a business from another person that would be a large business in the absence of paragraph (b), and under the agreement for the supply, acquired all or substantially all the property necessary for the particular person to carry on that business, the total of all amounts as determined by the following formula:

(E/F) × (365 – G)

where

"E" is the total of all consideration for taxable supplies made in Canada or made outside Canada through a permanent establishment in Canada by that particular person that became due or was paid to the person in relation to that business acquired by the person,

"F" is the number of days in the 12-month period immediately preceding the recapture period that are after that time, and

"G" is the number of days in the 12-month period immediately preceding the recapture period that are after that time and that are in the fiscal year referred to in paragraph (a).

In calculating the amount of consideration described in (a), (b) and (c) above, the following amounts should be included:

• any amount by which consideration for a supply is reduced because of a trade-in of tangible personal property by the recipient of the supply,
• consideration that is attributable to a supply made by a specified member of a qualifying group to another specified member of the same qualifying group, to the extent that the supply is deemed under the Act to have been made for no consideration, and
• the fair market value of a supply made between persons not dealing at arms length, to the extent that the consideration for the supply is less than fair market value.

However, in calculating the amount of consideration described in (a), (b) and (c) above, the following amounts should not be included:

• an amount attributable to the GST/HST, or to a provincial levy that is prescribed for the purposes of the Act (e.g., a provincial retail sales tax);
• an amount attributable to a supply by way of sale of real property that is capital property of the supplier;
• an amount attributable to a supply of a financial service; and
• an amount that is attributable to goodwill that is supplied as part of the supply of a business.

In calculating the amount of consideration described in (b) above, a person must include consideration attributable to taxable supplies made by an associated person that is not itself considered to be a large business (e.g., an associated person whose chief source of income is farming).

If a person or its associates has a fiscal year that is shorter or longer than 365 days, the $10 million threshold will be adjusted to reflect the length of the fiscal year.

Changes during a recapture period

If a person that is not a large business at the beginning of a particular recapture period has a fiscal year end during that recapture period and its threshold amount exceeds $10 million at that point, the person will generally not be considered to become a large business until the beginning of the next recapture period. Conversely, if a person that is a large business at the beginning of a particular recapture period has a fiscal year end during that recapture period and its threshold amount is below $10 million at that point, the person will generally continue to be considered to be a large business until the end of that recapture period.

Specified property and services

The RITC requirement will generally apply to specified property and services that are acquired, or brought into Ontario or British Columbia, by a large business for consumption or use by that business in these provinces. Property and services that are acquired in Ontario or British Columbia for consumption or use outside these provinces will generally not be subject to the RITC requirement.

In general, specified property and services include:

• qualifying motor vehicles, including certain vehicle parts and services, and in Ontario, motive fuel (other than diesel fuel) for use in motor vehicles;
• specified energy;
• specified telecommunication services; and
• specified meals and entertainment that are currently subject to an ITC repayment requirement of 50% under the Act.

However, the RITC requirement would generally not apply to the following specified property and services:

• specified property acquired by a large business for the sole purpose of being resupplied by that large business (i.e., either by way of sale, or by way of lease, licence or similar arrangement),
• specified property acquired by a large business for the sole purpose of it becoming a component part of other tangible personal property that is to be supplied by the large business, or
• a specified service that is acquired by a large business for the sole purpose of being resupplied by that business.

The particular circumstances in which the RITC requirement will apply to specified property and services are described in more detail below.

Qualifying motor vehicles

A qualifying motor vehicle will generally mean a vehicle that:

• is a motor vehicle;
• is licensed, or required to be licensed, under applicable provincial laws for use on a public highway (a vehicle that is licensed, or required to be licensed, exclusively for use elsewhere than on a public highway would generally not be considered to be a qualifying motor vehicle); and
• weighs while carrying its maximum capacity of fuel, lubricant and coolant, less than 3,000 kg at the time that the vehicle is first licensed or required to be licensed in Ontario or British Columbia, as the case may be.

For the purposes of the definition of a qualifying motor vehicle, a motor vehicle means a motorized vehicle designed for the transportation of individuals or of tangible personal property, but does not include:

• a power-assisted bicycle;
• a snow vehicle;
• an all-terrain vehicle;
• an electrically propelled wheelchair;
• a street car;
• a vehicle that runs only on rails, or
• a farm tractor, or other farm machinery, acquired, or brought into a province, exclusively for use in farming activities.

Qualifying motor vehicles will include vehicles that are acquired by way of sale, or by way of lease, licence or similar arrangement (including short-term rentals). However, a taxi permit-holder entrusting the operation and custody of a taxi to another person would not be considered to be an acquisition of a qualifying motor vehicle by that other person.

Parts and services

The RITC requirement will apply to vehicle parts and services that are acquired, or brought into Ontario or British Columbia, by a large business in respect of a qualifying motor vehicle if the parts and services are acquired or brought in within 12 months of the acquisition, or bringing into one of these provinces, of the vehicle itself (even if the vehicle was acquired or brought into these provinces before July 1, 2010), for example, the acquisition and installation of a vehicle anti-theft system. However, the RITC requirement will generally not apply to vehicle parts and services that are acquired, or brought into these provinces for the routine repair or maintenance of a qualifying motor vehicle of the business.

Use of qualifying motor vehicles before resupply

The RITC requirement will generally not apply in cases where a large business acquires, or brings into Ontario or British Columbia, a qualifying motor vehicle for the sole purpose of resupplying the vehicle. However, if the large business uses such a vehicle before resupplying it, the large business will generally be required to recapture a portion of the ITCs that it was entitled to claim in respect of the acquisition or bringing in of that vehicle. The large business will be required, for each month or part thereof that it uses the vehicle in a fiscal year to recapture the portion of the provincial part of the ITC that is attributable to 2% of the cost of the vehicle. This recapture is to be reported in the GST/HST return for the reporting period that includes the last day of that fiscal year.

Fuel for use in qualifying motor vehicles in Ontario

The RITC requirement will also generally apply to fuel (other than diesel fuel) that is acquired, or brought into Ontario, by a large business, to the extent that the fuel is for use by that business in the engine of a qualifying motor vehicle (even if the that vehicle was acquired, or brought into Ontario, prior to July 2010).

Specified energy

Specified energy will generally include the following when acquired, or brought into Ontario or British Columbia, for consumption or use in these provinces by a large business:

• electricity, gas, steam, and
• anything (other than fuel for use in a propulsion engine)^{Footnote 1} that can be used to generate energy
  • by way of combustion or oxidization, or
  • by undergoing a nuclear reaction in a reactor for the generation of energy.

For purposes of the RITC requirement, consideration for a single supply of specified energy will include the consideration attributable to transportation services and fees (e.g., delivery charges or regulatory fees) that are incidental to the supply of energy itself. Conversely, consideration for a supply of specified energy will generally not include consideration for transportation services that are not incidental to the supply of energy itself.

Production for sale

The RITC requirement will generally not apply to specified energy used by a large business directly in the production of:

• tangible personal property for sale, or
• production equipment or conditioning materials used by the large business in the production of tangible personal property for sale.

The RITC requirement will, however, generally apply to specified energy that is used by the large business to facilitate such production (i.e., and not directly in the production process), including specified energy that is used to light, heat, air condition or ventilate a production facility.

Production and production equipment

For purposes of the RITC requirement, "production" will generally mean the assembling, processing or manufacturing of tangible personal property to make other tangible personal property that is different from the first property by its nature or characteristics, and will include:

• the restoring of tangible personal property by its owner,
• the recording of images or sounds on media,
• the generation of any form of energy or its transformation into another form of energy ,
• the cutting, transformation and handling of timber in a forest, including the building and maintenance of forest access roads in the course of carrying on a timber business,
• the extraction and processing of minerals to the first stage of concentration or the equivalent, and
• the transformation of toxic industrial waste into a non-toxic product.

Production will also generally include the following activities when performed in conjunction with one of the production activities described above:

• the cleaning, screening, sifting, wrapping, packing or putting into containers of personal property;
• the transportation of refuse or waste derived from producing personal property,
• the quality control of personal property being produced or of production equipment, and
• the detection, measurement, treatment, reduction or elimination of water, soil or air pollutants that are attributable to producing personal property.

However, "production" will generally not include (a) the storage of finished products or (b) the assembly, processing or manufacturing of tangible personal property in a retail establishment. For purposes of the RITC requirement, "production equipment" will generally mean

• machinery, tools, equipment and accessories used directly in the production of tangible personal property,:
• moulds and dies,
• media for recording images or sounds,
• plans, drawings, models and prototypes,
• components or spare parts of the property described in paragraphs (a) to (d),
• materials used to produce or repair the property described in paragraphs (a) to (e), and
• explosives and the material to manufacture them.

For purposes of the RITC requirement, specified energy used by the following kinds of businesses will generally not be considered to be used in the production of tangible personal property for sale:

• financial institutions,
• hotels, bars, coffee shops and restaurants,
• auto repair shops, and
• scrap metal dealers.

Production proxy

To simplify compliance with the RITC requirement, a large business producing tangible personal property in Canada for sale (and in its last fiscal year carried on such Canadian production activities at least 10% in British Columbia or primarily in Ontario) will generally be able to elect to use a production proxy to determine what portion of the specified energy that it acquires for use in these provinces will be considered to be used directly in the production of tangible personal property for sale (and hence not subject to the RITC requirement), and consequently, what portion of the provincial component of the HST payable on the energy costs is subject to recapture.

The election Form RC4530, Election or Revocation of an Election to Use a Production Proxy to Report the Recapture of Input Tax Credits, will have to be filed with the CRA by the due date of the GST/HST return for the first reporting period in a particular recapture period and will generally apply for that entire recapture period. The election will remain in effect until revoked, and can only be revoked if used for a minimum of one recapture period.

This production proxy will be based on the Canadian detail of the North American Industry Classification System for 2007 ("NAICS Canada 2007"), which is a statistical tool that classifies particular sectors, subsectors and industries into categories based on production oriented principles.

Specifically, if the most significant business activity of a large business in its last fiscal year fell into one of the 24 categories described below (which are based on NAICS Canada 2007 categories), it will be eligible to use, in the current recapture period one of three fixed percentages to determine the portion of the total amount of specified energy that it acquires for use in Ontario or British Columbia that will not be considered to be used directly in the production of tangible personal property for sale. These percentages reflect the average proportion of energy that is not used directly in such production activities in a particular industrial sector.

• For a large business whose most significant business activity in its last fiscal year fell within one of the following categories (the corresponding three-digit NAICS Canada 2007 codes are also provided), the production proxy will be 4%:
  • 113 – forestry and logging;
  • 211 – oil and gas extraction;
  • 212 – mining and quarrying (except oil and gas);
  • 322 – paper manufacturing;
  • 324 – petroleum and coal product manufacturing;
  • 325 – chemical manufacturing;
  • 327 – non-metallic mineral product manufacturing; and
  • 331 – primary metal manufacturing.
• For a large business whose most significant business activity in its last fiscal year fell within one of the following categories, the production proxy will be 13%:
  • 311 – food manufacturing;
  • 312 – beverage and tobacco manufacturing;
  • 313 – textile mills;
  • 314 – textile product mills;
  • 321 – wood product manufacturing;
  • 326 – plastics and rubber products manufacturing; and
  • 332 – fabricated metal product manufacturing.
• For a large business whose most significant business activity in its last fiscal year fell within one of the following categories, the production proxy will be 30%:
  • 315 – clothing manufacturing;
  • 316 – leather and allied product manufacturing;
  • 323 – printing and related support activities;
  • 333 – machinery manufacturing;
  • 334 – computer and electronic product manufacturing;
  • 335 – electrical equipment, appliance and component manufacturing;
  • 336 – transportation equipment manufacturing;
  • 337 – furniture and related product manufacturing; and
  • 339 – miscellaneous manufacturing.

GST/HST registrants that are large businesses whose most significant business activity in its last fiscal year did not fall within any of the foregoing categories (or that did not carry on at least 10% of their Canadian production activities in British Columbia, or that did not carry on their Canadian production activities primarily in Ontario) will not be entitled to use this proxy for the current recapture period.

Scientific research and experimental development (SR&ED) activities and the SR&ED proxy

The RITC requirement will generally not apply to specified energy used by a large business directly in activities that are qualifying SR&ED activities in Ontario for purposes of the Taxation Act, 2007 (Ontario) or directly in activities that are SR&ED activities in British Columbia for purposes of the British Columbia Income Tax Act. A large business engaged in SR&ED activities in its current taxation year that is eligible for, and actually claims, SR&ED expenditures or investment tax credits for income tax purposes in that taxation year will generally only be required to recapture ITCs other than those available in respect of the specified energy used directly in the qualifying SR&ED activities.

A large business will be able to either track the actual amount of specified energy used directly in qualifying SR&ED activities, or use the following formula (i.e., the SR&ED proxy) to determine what portion of the specified energy will not be considered, for purposes of the RITC requirement, to be used directly in qualifying SR&ED activities.

A = B/C

where:

"A" is the proportion (expressed as a percentage) of the specified energy not considered to be used directly in qualifying SR&ED activities in Ontario or British Columbia;

"B" is the total amount of the portion of the salaries and wages of employees of the large business that were paid by the large business in the second last taxation year of the person and that were not directly engaged in SR&ED activities in Ontario or British Columbia; and

"C" is the total amount of salaries and wages of employees of the large business in Ontario or British Columbia that were paid by the large business in the second last taxation year of the large business.

The resulting amount will be the amount of energy subject to the RITC requirements.

Ordered application of proxies to specified energy

If a large business is using both the SR&ED proxy and the production proxy, it will apply the first proxy to the specified energy it acquires for use in Ontario or British Columbia, and then apply the other proxy to the residual amount (i.e. instead of adding the two percentages together and applying the sum of these two percentages). This "ordered" approach to applying the proxies to specified energy will help ensure that some portion of that energy will be subject to the RITC requirement (reflecting the fact that some energy will be attributable to other uses, such as overhead).

Specified telecommunication services

Specified telecommunication services will generally include:

1. the service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system; and
2. the making available for such emission, transmission or reception a telecommunications channel, such as a telecommunications circuit, line, frequency, channel, partial channel or other similar means of transmitting a telecommunication (but not a satellite channel)

when acquired for consumption or use in Ontario and British Columbia.

Thus, the RITC requirement will generally apply to services such as:

• local and long-distance telephone,
• cable and pay television,
• satellite television,
• facsimile and electronic mail,
• video, audio and computer link-ups, and
• data transmission acquired by a large business for use in Ontario or British Columbia by that large business.

However, the RITC requirement will generally not apply to:

• internet access services;
• web-hosting services;
• toll-free telephone services (e.g., 1-800, 1-866, 1-888 or 1-877 telephone services) or a telecommunication service related to toll free telephone services; and
• telecommunication services acquired by a sponsor or organizer of a convention for use exclusively at that convention.

Supplies that are provided by means of telecommunication, but are not themselves telecommunication services, will generally not be subject to the RITC requirement. Examples of supplies that are provided by means of telecommunication include:

• building surveillance services,
• news services offered by press agencies,
• a right to access a data bank, and
• services provided by means of a 1-900 telephone service.

Proxies for specified telecommunication services

If a large business receives an invoice for a single supply that includes both specified telecommunication services and other services and/or goods (i.e., that are not subject to the RITC requirement), and the large business cannot readily ascertain which portion of the provincial component of the HST applicable to the supply is attributable to these other services and/or goods, the large business will be allowed to use the following proxies to make that determination.

For Ontario:

1. If the supply covered by the invoice includes specified telecommunication services, other services, and goods (e.g., telecom equipment rental), then 14% of the consideration for the supply will be deemed to be attributable to the other services and goods. 
2. If the supply covered by the invoice includes specified telecommunication services and other services (but no goods), then 4% of the consideration for the supply will be deemed to be attributable to the other services.
3. If the supply covered by the invoice includes specified telecommunication services and goods (but no other services), then 11% of the consideration for the supply will be deemed to be attributable to the goods.

For British Columbia:

If the supply covered by the invoice includes specified telecommunication services and other services and/or goods (e.g., telecom rental), then 5% of the consideration for the supply will be deemed attributable to the other services and/or goods.

No election is required to be filed to use these proxies.

Specified meals and entertainment

Section 236 of the Act requires GST/HST registrants to recapture 50% of the ITCs they claimed on meal and entertainment expenses that are subject to the 50% deductibility under the Income Tax Act. This recapture also applies to allowances and reimbursements paid by the registrant for these expenses and for which the registrant has claimed input tax credits.

Specified property and services will generally include food and beverages for human consumption (meals) and entertainment that are acquired by a large business in Ontario or British Columbia, to the extent that the meals or entertainment are subject to the existing (generally 50%) ITC recapture requirement in the Act (specified meals and entertainment).

Thus, meals and entertainment subject to the RITC requirement will include:

• business dinners;
• tickets for a theatre, concert, athletic event or other performance;
• private boxes at sports facilities; and
• admissions to nightclubs, athletic, social and sporting clubs.

Conversely, meals and entertainment not subject to the RITC requirement will generally include:

• meals or entertainment acquired solely for the purpose of resupply (e.g., by a restaurant or airline);
• meals or entertainment acquired for certain events where all employees from a particular location are invited (e.g., an office Christmas party); and
• meals or entertainment for an employee in situations where the expenses are required to be included in the employee’s income as a taxable benefit under the Income Tax Act.

See Example 36.

Meal expenses for long-haul truck drivers

For 2010, meal expenses for long haul truck drivers are deductible under the Income Tax Act at 75%, and registrants are required to recapture 25% of the ITC claimed for the tax paid or payable for these meal expenses. After 2010, these percentages will be 80%, and 20%, respectively. Meal expenses for long haul truck drivers will not be specified property and services. Consequently, the provincial part of the HST payable on meal expenses for long haul truck drivers will not be subject to recapture.

Special cases

Specified property and services brought into Ontario and British Columbia

If a large business:

• brings a specified property into Ontario or British Columbia from another province or country; or
• acquires a specified service in another province or country,

and the specified property or service is for use in Ontario or British Columbia (in whole or in part) by the large business, then that large business will generally be required to recapture the provincial component of the ITC that would have been available in respect of the specified property or service if the HST were payable in respect of that bringing in or acquisition (i.e., even if the property or service was acquired, or brought into the province, for consumption or use exclusively in commercial activities of the large business).

Specified members of a qualifying group

If a large business is a specified member of a qualifying group that has made an election for closely related persons under the Act, and that large business acquires a specified property or service from another specified member of the same qualifying group, the large business will also generally be required to recapture the provincial component of any ITCs that would have been available if the HST were payable in respect of that acquisition (i.e., even if the supply is deemed under the Act to have been made for no consideration).

Non-arm’s length transactions

If a supply of a specified property or service is made for no consideration, or for consideration at less than fair market value, between persons who are not dealing with each other at arm’s length for purposes of the Act, the recipient of the supply (if it is a large business) will generally be required to recapture ITCs as if the supply had been made at fair market value (i.e., even if the property or service was acquired, or brought into the province, for consumption or use exclusively in commercial activities of the large business).

Fuel acquired in or brought into British Columbia for use as specified energy

If a large business acquires or brings in fuel for use as specified energy in British Columbia, and that fuel was subject to the point of sale rebate in British Columbia, so that only 5% HST was paid or payable on the purchase, the large business will be required to recapture an amount equal to the provincial part of the HST that would have been payable.

Specified property or services supplied by the operator of a joint venture

Where an election under section 273 of the Act is in effect for a joint venture, paragraph 273(1)(c) of the Act deems supplies of property or services made by the operator to a co-venturer not to be supplies to the extent that the property or services are for consumption or use in the course of commercial activities for which the joint venture agreement was entered into.

If this property or service supplied to a co-venturer by the operator is a specified property or service, the co-venturer, if a large business, will be required to recapture an input tax credit equal to the provincial component of the HST that would have been payable if the supply of the property or service had not been deemed not to be a supply.

Allowances and reimbursements

If a large business pays an allowance or a reimbursement to an employee or a partner in circumstances where ITCs would be available under the Act to the large business in respect of that allowance or reimbursement, the large business will generally be required to recapture the provincial component of those ITCs to the extent that the allowance or reimbursement is attributable to specified property and services.

If a large business uses the factor method instead of the exact calculation method to compute the eligible input tax credits (ITCs) on reimbursements, these factors are 11/111 for reimbursements for taxable supplies made in British Columbia, and 12/112 for reimbursements for taxable supplies made in Ontario. For any of these reimbursements attributable to specified property or services, factors of 7/12 for British Columbia, and 8/13 for Ontario, may be used to determine the amount of the RITC.

Deduction from net tax – for qualifying motor vehicles sold or removed from the province

If, at a particular time, a large business sells a qualifying motor vehicle, or removes it from either the province of Ontario or British Columbia and registers it in another province, and the large business had previously reported an RITC in its net tax calculation for that motor vehicle, the person may deduct from its net tax for the reporting period that includes that time (that is, reduce the amount of RITC to report), an amount determined by the formula

A ´ (B/C)

where

"A" is the total of all amounts reported as RITCs in respect of the last acquisition or bringing in of the qualifying motor vehicle by the large business

"B" is

1. if the large business supplies the qualifying motor vehicle to a recipient that is not dealing at arm’s length with the large business, or if the large business removes the qualifying motor vehicle from the province, the fair market value of the qualifying motor vehicle at that time, and
2. in any other case, the consideration for the supply by way of sale of the qualifying motor vehicle; and

"C" is the consideration in respect of that last acquisition, or the value in respect of the last bringing in, of the qualifying motor vehicle by the large business in respect of which the amount determined under the description of A is attributable.

Accounting for recaptured ITCs

When to account for recaptured ITCs

A large business will generally be required to account for recaptured ITCs in its GST/HST return for the reporting period in which the ITCs first become available, i.e., in the first reporting period in which the provincial component of the HST to which the ITCs relate becomes payable, or is paid without having become payable.

Exception

If under the Act, a large business is currently required to recapture ITCs that it claimed in respect of a particular specified property or service in a reporting period other than the reporting period in which the ITCs first become available (i.e., certain meals and entertainment expenses and passenger vehicle lease payments), then the large business will generally be required, under the RITC requirement, to recapture the provincial part of the ITCs in respect of that same specified property or service in that same reporting period, , multiplied by the recapture rate(s) applicable to the reporting periods in which the HST became payable on the lease payments, The resulting amount would be the amount recaptured in that reporting period.

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 without having become due, 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
• part of the specified service (at least 10%) is performed on or after July 1, 2010,

the large business will generally be required to self-assess the provincial component of the HST payable in respect of that property or part of the service either: (i) 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 (ii) in any other case, in prescribed form and before November 2010. The large business will then recapture any ITCs available in respect of that provincial component of the HST in the GST/HST return for the reporting period in which any available ITCs first become available.

How to account for recaptured ITCs on the GST/HST NETFILE return

The CRA News Release and Backgrounder of January 4, 2010, entitled Government of Canada announces new electronic filing requirements for GST/HST registrants, announced that for reporting periods ending on or after July 1, 2010, GST/HST registrants who are subject to the RITC requirement (large businesses) will be required to calculate and report their ITCs in the GST/HST NETFILE return. GST/HST NETFILE is a free internet-based service that allows persons to file their returns with the CRA on-line.

The GST/HST NETFILE return will be similar to the existing GST/HST paper return, with some additional fields that will, among other things, allow filers to report recaptured ITCs. One of these new fields on the GST/HST NETFILE return will ask whether the filer is required to report recaptured ITCs in the reporting period. If the answer is yes, then a particular schedule to the return, Schedule B, Calculation of Input Tax Credits (Schedule B) will automatically be displayed and the filer will be required to complete that schedule in the following manner:

1. The filer will calculate the total amount of ITCs and adjustments claimed in that reporting period, including ITCs subject to recapture, and enter this amount in the field for Gross ITCs and Adjustments (before recapture).
2. The filer will calculate the total amount of ITCs subject to recapture in Ontario (Gross RITCs for Ontario) and, in a separate field, the total amount of ITCs subject to recapture in British Columbia (Gross RITCs for British Columbia).
3. Gross RITCs for Ontario and Gross RITCs for British Columbia will be multiplied by the rate of ITC recapture in effect in each province during the particular reporting period to arrive at Net RITCs for each province.
4. Net RITCs for each province will be added, and this sum will be automatically subtracted from Gross ITCs and Adjustments (before recapture) to arrive at Total ITCs and Adjustments for the purposes of calculating net tax.

The CRA has recently released a video on filing and paying your GST/HST return electronically. It can be viewed at http://www.cra-arc.gc.ca/gncy/hrmnztn/wbcsts/wtchwbcsts-eng.html?clp=wc20100326-06-eng. In addition, information on GST/HST NETFILE is available at http://www.cra-arc.gc.ca/esrvc-srvce/tx/bsnss/gsthst-tpstch-ntfl/menu-eng.html.

It is important to note that, other than the ITCs referred to in "Exception" in the section entitled "When to account for recaptured ITCs" and those referred to in "Use of qualifying motor vehicles before resupply" in the section entitled "Qualifying Motor Vehicles", a large business will be required to recapture the provincial portion of ITCs in respect of the provincial part of the tax paid or payable on specified property and services in the first reporting period in which the ITCs become available. Large businesses cannot simply forego claiming ITCs in order to fulfill the RITC requirement (even if the effect on net tax would be the same). In this way, the RITC requirement differs from the existing restriction on ITRs in Québec. Failing to recapture ITCs as and when required could result in penalties.

This approach to reporting and accounting for recaptured ITCs is necessary in order to allow administrators to properly allocate GST/HST revenues to HST provinces and to the federal government.

How to adjust GST/HST returns for misreported recaptured ITCs

If a large business incorrectly reports recaptured ITCs in a particular reporting period, and wishes to correct the error, it should send a letter to its local Tax Centre requesting that its GST/HST return for that period be adjusted to report the correct amount of recaptured ITCs. The Tax Centre will process the adjustment to the applicable reporting period.

Option to use an Estimation/Reconciliation Method for accounting of RITCs

In order to help simplify compliance with the RITC requirement, a large business may elect to use the Instalment Method (hereafter referred to as the Estimation/Reconciliation Method) to account for recaptured ITCs, using Form RC4531, Election or Revocation of an Election to Use the Estimation and Reconciliation Method to Report the Recapture of Input Tax Credits. A large business may file the election with the CRA in the following circumstances.

• If a GST/HST registrant exceeds the RITC threshold amount at the end of its fiscal year and becomes a large business on the first day of the next recapture period, (July 1), the election is effective on the first day of that recapture period and is to be filed on or before the due date of the GST/HST return for the reporting period that includes that month of July.
• If a GST/HST registrant that is a large business has been recapturing ITCs using the Actual Method and chooses to use the Estimation/Reconciliation Method, the election is effective the first day of the fourth month following the large business’s fiscal year end. The election is to be filed on or before the due date of the GST/HST return for the reporting period that includes that day.

A GST/HST registrant cannot elect to use the Estimation/Reconciliation Method in a fiscal year, if that fiscal year is the registrant’s first fiscal year.

An election to use the Estimation/Reconciliation Method remains in effect until revoked and can be revoked effective the first day of an instalment period that begins after the election became effective.

Under the Estimation/Reconciliation Method, for each province that has an RITC requirement, a large business will:

• estimate the amount of ITCs it will be required to recapture during a fiscal year;
• based on this estimate, report an equal amount of recaptured ITCs in each reporting period during the period that begins three months after the beginning of its fiscal year and ends three months after the end of that fiscal year (the Instalment Period); and
• at the end of its fiscal year, determine the actual amount of ITCs it should have recaptured during that fiscal year and reconcile any differences between the actual amount and the amounts reported during the fiscal year.

Under the Estimation/Reconciliation Method, a large business will still have to identify the specified property and services that 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 in each province with such a requirement. However, this method will allow the large business to account for these recaptured ITCs on a fiscal year basis and on the basis of aggregate financial information.

Large businesses will still be able to use any proxies otherwise available to them when using the Estimation/Reconciliation Method (e.g. the proxy for specified energy used directly in the production of tangible personal property for sale).

Step 1:  Estimation

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

• ITCs that 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 that it would be required to recapture in its current fiscal year because of anticipated changes in circumstances (i.e., in comparison to the previous fiscal year).

A large business will not be allowed to use an Estimated RITC amount that was less than the actual amount of ITCs that the large business was (or would have been) required to recapture in the previous fiscal year. However, it could use a greater amount.

Step 2:  Reporting Estimated RITC amounts

A large business using the Estimation/Reconciliation Method will generally be required to report its Estimated RITC amount, for each province with an RITC requirement, over the course of the period that begins three months after the beginning of its fiscal year and ends three months after the end of that fiscal year (the Instalment Period).

The Estimation/Reconciliation Method is a simplification measure to ease the administrative burden of recapturing input tax credits for large businesses with substantial acquisitions of specified property and services. As a simplification measure, all specified property and services will be considered to be acquired evenly throughout a fiscal year. Therefore, to determine the amount of recaptured ITCs that must be reported in each reporting period during the Instalment Period, a large business will generally divide the relevant Estimated RITC amount by the number of GST/HST reporting periods in the Instalment Period (e.g., a monthly filer will generally divide the amount by 12). The equal amounts should be included in Schedule B to the GST/HST NETFILE return of the large business as Gross RITCs for each reporting period in the particular Instalment Period.

For 2010, the Instalment Period will generally be a 12 month period to calculate the monthly RITC amounts. However, the recapture period does not begin until July 1, 2010, so a large business will only begin reporting this monthly amount in the first reporting period that includes July 1, 2010.

Step 3:  Reconciliation

After the end of its fiscal year, a large business using the Estimation/Reconciliation Method will 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, during that year. These amounts will represent the Actual RITCs for each of those provinces during that fiscal year.

The reconciliation will be completed in a reporting period of the large business that occurs within three months of the end of the fiscal year. For example, if a fiscal year ends on December 31 of a particular calendar year, the reconciliation should take place in a reporting period that includes a date before April 1 of the next calendar year.

However, to simplify administration, for RITC amounts reported in 2010, no reconciliation can take place before April 2011. If a large business has a fiscal year that ends after the implementation of the HST in July 2010 and before January 2011, it will be required to perform any relevant reconciliation in the reporting period that includes April 1, 2011. Similarly, if a large business has a fiscal year that ends after December 31, 2010, it will be required to perform any relevant reconciliation in a reporting period that includes a date that is on or after April 1, 2011, and is within three months of the end of its fiscal year.

Schedule C – Reconciliation of Recaptured Input Tax Credits (RITCs)

The GST/HST NETFILE return will be amended to include a question asking if a RITC reconciliation is being made for that reporting period. If the answer is yes, the registrant will be prompted to complete the reconciliation schedule. The large business will report the actual amount of input tax credits that should have been recaptured in the fiscal year. This amount will then be compared to the Gross RITCs amount reported to date in the Schedule B of the GST/HST returns for the same fiscal year using the Estimation/Reconciliation Method. The large business will report any differences between these two amounts in Schecule C – Reconciliation of Recaptured Input Tax Credits (RITCs) (Schedule C) of the GST/HST NETFILE return.

On Schedule C, the large business will also report the differences between the Actual Net RITCs that should have been reported, and the Net RITCs that were reported in the GST/HST returns for that fiscal year. The difference between these Net RITC amounts will be automatically recorded in a new field of the GST/HST NETFILE return. Until June 30, 2015, Net RITCs will be 100% of Gross RITCs. For Recapture Periods beginning July 1, 2015, and until June 30, 2018, Net RITCs will be a percentage of Gross RITCs.

Estimating RITCs where the RITC requirement has been in effect less than one year

When using an amount of actual RITCs from a previous fiscal year as a basis for estimated RITCs for a current fiscal year, if in that previous fiscal year the RITC requirement was only in effect for part of that year, or the registrant becomes a large business for only part of that year, the large business will need to adjust that amount to reflect what its RITCs would be for the full fiscal year.

Reconciliation for the 2011 fiscal year, estimation, and reporting RITC amounts for the 2012 fiscal year

Estimation/Reconciliation Method – 2015 fiscal year

2016 fiscal year

The last recapture period ending June 30, 2018

Estimation/Reconciliation Method – special cases

Large business at the time of GST/HST registration

If a person is a large business at the time it registers for GST/HST (for example, because the RITC thresholds of its associated persons are over $10 million), the large business cannot elect to use the Estimation/Reconciliation Method for reporting its RITCs, if this is the large business’s first fiscal year. However, it may elect to use the Estimation/Reconciliation Method for reporting its RITCs in its GST/HST returns in its first Instalment Period in its next fiscal year. The large business would estimate its RITCs based on its current fiscal year.

Estimated RITCs based on a prior short fiscal year

Where a large business’s Estimated RITCs are based on a prior fiscal year that is shorter than one year, the large business will need to prorate the RITCs from the prior fiscal year to reflect a one year period.

When a large business ceases to be registered for GST/HST purposes

If a large business ceases to be registered for GST/HST purposes (for example, the legal entity no longer exists because it is wound up or it amalgamates with another corporation) then its Instalment Period will also end on that date. It will be required to reconcile its RITCs in its GST/HST NETFILE return for its last reporting period that it is registered for GST/HST.

Enquiries by telephone

All technical publications related to the GST/HST are available on the CRA Web site at www.cra.gc.ca/gsthsttech.