Applying the 2008 GST/HST Rate Reduction to Allowances and Reimbursements

GST/HST Info Sheet GI-039
November 2007

This info sheet explains how the proposed reduction in the rate of the goods and services tax (GST) and the federal component of the harmonized sales tax (HST) will apply to allowances or reimbursements for transactions that straddle the date the reduced rates come into effect, which is January 1, 2008.

In this info sheet, "taxable" means subject to the GST/HST at the rates of 6% and 14%, or at the reduced rates of 5% and 13%. "Participating province" refers to the provinces of Nova Scotia, New Brunswick, and Newfoundland and Labrador.

The HST applies only to supplies made in or imported into a participating province. The GST applies to supplies made in or imported into the rest of Canada. If you are uncertain as to whether a supply is made in a participating province, refer to GST/HST Technical Information Bulletin B-078, Place of Supply Rules under the HST.

Background

Effective January 1, 2008, the rates of the GST and the HST will be reduced. The rate of the GST will be reduced from 6% to 5%. The rate of the HST will be reduced from 14% to 13%. The Minister of Finance is introducing legislative amendments to implement these changes (see Bill C-28, Budget and Economic Statement Implementation Act, 2007).

General transitional rule

Generally, the new rates of tax apply to the supply of taxable (other than zero-rated) goods and services in the following circumstances:

• if the GST/HST becomes payable on or after January 1, 2008, without having been paid before that day, the rate of 5% GST or 13% HST will apply;
• if the GST/HST is paid on or after January 1, 2008, without having become payable before that day, the rate of 5% GST or 13% HST will apply.

If the GST/HST becomes payable, or is paid without having become payable, in 2007, the rate of 6% GST or 14% HST will continue to apply.

Transitional provisions for deemed supplies

In certain circumstances the GST/HST is deemed to have been paid or collected on a particular day. Under the proposed legislative amendments, the rate of 5% GST or 13% HST will apply where the GST/HST is deemed to have been paid or collected on or after January 1, 2008.

The current legislation concerning allowances and reimbursements paid by employers to employees, by partnerships to partners, or by public institutions and charities to their volunteers deems the GST/HST to be paid by these persons at specific times. As long as all the criteria outlined below are met, and as long as these allowances or reimbursements do not result in taxable benefits to the individuals receiving them, the person who pays these allowances or reimbursements is deemed to have paid the GST/HST, and may be entitled to claim an input tax credit (ITC) or rebate for the deemed tax paid.

Whether the reduced rates of tax apply to these allowances and reimbursements depends on the date the allowance or reimbursement is paid.

Allowances

A person is deemed to have paid the GST/HST on an allowance paid to:

• an employee of the person,
• where the person is a partnership, a member of the partnership, or
• where the person is a charity or public institution, a volunteer who gives services to the charity or public institution,

as long as the conditions listed below are met.

1. The allowance is used to pay for supplies of property or services all or substantially all (90% or more) of which are taxable supplies, and are acquired in Canada by the employee, partner, or volunteer in relation to the activities engaged in by the person.

2. The allowance is deductible in computing the income of the person paying the allowance for purposes of the Income Tax Act, or would be deductible if the person were a taxpayer under that Act and the activity was a business (note that the full amount of the allowance does not have to be deductible for income tax purposes, but some of the amount must be deductible).

3. If the allowance is for the use in Canada of a motor vehicle in relation to the activities of the person, it must be considered to be a reasonable allowance for income tax purposes.

When these conditions are met, the person paying the allowance is considered to have received the property or services, and any consumption or use of the property or services by the employee, partner or volunteer is considered to be consumption or use only by the person. In addition, the person is considered to have paid, at the time the allowance is paid to the employee, partner, or volunteer, the GST/HST in respect of the property or services.

The GST/HST deemed to have been paid on the allowance is calculated by the formula

A × B

where

A is the amount of the allowance and

B is

• for an allowance paid before January 1, 2008:

1. 14/114, where 90% or more of the supplies for which the allowance is paid were made in participating provinces, or if the allowance is paid for the use of a motor vehicle in participating provinces, and
2. in any other case, 6/106.

• for an allowance paid on or after January 1, 2008:

1. 13/113, where 90% or more of the supplies for which the allowance is paid were made in participating provinces, or if the allowance is paid for the use of a motor vehicle in the participating provinces, and
2. in any other case, 5/105.

Reimbursements

A person is deemed to have paid the GST/HST on a reimbursement paid to:

• an employee of the person,
• where the person is a partnership, a member of the partnership, or
• where the person is a charity or public institution, a volunteer who gives services to the charity or public institution,

as long as the conditions listed below are met.

1. The employee, partner or volunteer must have paid the GST/HST on the taxable property or services acquired, imported, or brought into a participating province.

2. The employee, partner or volunteer must have consumed or used the property or services in relation to the activities of the person.

When these criteria are met, the person is deemed to receive a supply of the property or service, and to have consumed or used the property or service. The person is also deemed, on the day the reimbursement is paid, to have paid tax in respect of the supply of the property or service.

The deemed tax paid on the reimbursement is equal to the amount determined by the formula

A × B

where

A is the tax paid by the employee, partner or volunteer in respect of that person's acquisition, importation or bringing into a participating province of the property or service; and

B is the lesser of

1. the percentage of the cost to the employee, partner or volunteer of the property or service that is reimbursed, and
2. the extent (expressed as a percentage) to which the property or service was acquired, imported or brought into the province, as the case may be, by the employee, partner or volunteer for consumption or use in relation to the activities of the employer, partnership, charity or public institution.

Registrants may choose one of the following two methods to calculate the deemed tax paid in relation to reimbursements for expenses incurred in Canada:

• use the exact calculation method as shown above, or
• recognizing that certain expenses may include tips, gratuities, or provincial sales taxes, use a factor of 5/105 or 13/113 for reimbursements paid in 2007.

Documentary requirements

Registrants who use the factor of 5/105 or 13/113 for reimbursements are exempt from the general documentary and information requirements for claiming ITCs if they maintain books and records (including all documentation currently required to substantiate such deductions under the Income Tax Act) that contain the following information:

• the name and GST/HST registration number of the registrant who paid the reimbursement;
• the name of the employee, partner or volunteer who received a reimbursement;
• the total amount of the reimbursement paid to each employee, partner or volunteer;
• the total GST or HST deemed to have been paid for the reimbursement (5/105 or 13/113 of the total amount);
• the reporting period in which the reimbursement was made; and
• the nature of the supply or expense.

Effective for reimbursements paid on or after January 1, 2008, a registrant will be allowed the option of multiplying the total amount reimbursed for expenses by the factor of 4/104, if 90% or more of these expenses are taxable at 5% GST, or by the factor of 12/112, if 90% or more of these expenses are taxable at 13% HST.

The calculation method chosen must be used consistently within each category of reimbursed amounts (e.g., airfare, hotel accommodation, food, beverages, and entertainment) throughout the fiscal year.