Prince Edward Island: Transition to the Harmonized Sales Tax – Builders and Recaptured Input Tax Credits

GST/HST Info Sheet GI-165
April 2013

A harmonized sales tax (HST) came into effect in Prince Edward Island (P.E.I.) effective April 1, 2013.

The HST rate in P.E I. is 14% of which 5% represents the federal part and 9% the provincial part.

This info sheet explains how the recapture of input tax credits (RITC) requirement applies to builders in Prince Edward Island (P.E.I.).

Definitions for GST purposes, e.g., builder, commercial activity, consideration, financial service, person, property, real property, service, supply, and taxable supply, generally apply under the HST, as do the CRA's current policies on the application of the GST to housing. Guide RC4052, GST/HST Information for the Home Construction Industry, and GST/HST Info Sheet GI-005, Sale of a Residence by a Builder Who is an Individual, discuss many of these important terms and concepts.

Builders who are registered for GST/HST purposes are entitled to claim input tax credits (ITCs) to recover the provincial part of the HST payable on most purchases and operating expenses for consumption, use, or supply in the course of their commercial activities, in the same way and under the same rules that apply to the recovery of the GST. The GST/HST rules for various types of expenses are explained in Guide RC4052. Builders are not entitled to claim ITCs for any provincial sales tax paid or owing.

In some cases, however, GST/HST registrant builders are required to repay the provincial part of certain amounts claimed as ITCs.

Affected builders are not allowed to simply forego claiming ITCs in order to fulfill the RITC requirement (even if the effect on net tax would be the same). Failure to recapture ITCs in the proper manner may result in penalties.

Under the HST, the Province of P.E.I. temporarily restricts ITCs for the provincial part of the HST.

Generally ITCs for the provincial part of the HST paid or payable on "specified property and services" that a "large business" acquires, or brings into the province, for consumption or use by the large business in the province must be recaptured. The terms "specified property and services" and "large business" are described below.

Recapture period

For RITC purposes, the recapture period means a one-year period that:

The first recapture period for P.E.I. is July 1, 2012 to June 30, 2013 but the requirement to recapture begins after March 31, 2013.

Large business

Generally, a person is considered a large business during a particular recapture period if the person is a GST/HST registrant and

A builder that satisfies either of these criteria is considered to be a large business even if the builder does not have a permanent establishment in P.E.I.

The RITC requirements for selected listed financial institutions are not included in this info sheet.

Public service bodies such as municipalities, hospital authorities, universities, public colleges, school authorities, charities, and non-profit organizations are not considered large businesses. Therefore, this info sheet does not apply to them.

RITC threshold amount

When calculating its RITC threshold amount, a GST/HST registrant builder must generally include all consideration for the following taxable supplies that became due or was paid without having become due in their last fiscal year that ended before the recapture period:

The builder must also generally include all consideration for such supplies made by any other person that is associated (for GST/HST purposes) with the builder that became due or was paid without having become due in the associated person's last fiscal year that ended before the recapture period. This includes consideration for supplies made by an associated person that would not, on its own, be considered to be a large business.

The consideration for taxable supplies by the builder or a person associated with the builder includes:

The consideration for taxable supplies by the builder or a person associated with the builder does not include:

Example 1

Builder A is a GST/HST registrant that builds houses for sale. The total consideration for Builder A's taxable supplies in its fiscal year ending March 31, 2012 was $8.5 million. Company B is a GST/HST registrant that is associated with Builder A for GST/HST purposes. Company B manufactures cabinets and the total consideration for Company's B's taxable sales in its fiscal year ending December 31, 2011 was $3 million.

Both Builder A and Company B are considered to be large businesses for RITC purposes during the recapture period of July 1, 2012 to June 30, 2013 because each is considered to have an RITC threshold amount equal to $11.5 million.

If a builder has a fiscal year that is shorter or longer than 365 days, the calculation of the RITC threshold amount must be adjusted to reflect the length of a full fiscal year of 365 days.

If a partnership is a large business and a member of the partnership (other than an individual) acquires, or brings into P.E.I. a specified property or service for consumption or use in the province, and that consumption or use is in respect of the activities of the partnership, but not on the account of the partnership, the member, if a GST/HST registrant, is generally considered to be a large business for that particular acquisition or bringing in.

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 a specified property or service into P.E.I. on behalf of that participant for consumption or use in the province, the operator is generally considered to be a large business for that particular acquisition or bringing in.

Changes during a recapture period

If a person that is not a large business at the beginning of a recapture period has a fiscal year end during that recapture period and the person's RITC threshold amount exceeds $10 million at that point, the person would generally not become a large business until the beginning of the next recapture period.

Example 2

You are a builder with a fiscal year end of December 31 and for GST/HST purposes you are not associated with any other person. Your RITC threshold amount for the fiscal year ending December 31, 2011 is $8 million. Therefore, you are not a large business during the recapture period of July 1, 2012 to June 30, 2013. At the end of your fiscal year ending December 31, 2012, your RITC threshold amount is $11 million. You would not become a large business until July 1, 2013, and would be a large business during the recapture period of July 1, 2013 to June 30, 2014.

If a person that is a large business at the beginning of a recapture period has a fiscal year end during that recapture period and its RITC threshold amount is below $10 million at that point, the person would generally continue to be a large business until the end of that recapture period.

Example 3

You are a builder with a fiscal year end of December 31. Your RITC threshold amount for the fiscal year ending December 31, 2011 is $12 million. Therefore, you are a large business during the recapture period of July 1, 2012 to June 30, 2013. For your fiscal year ending December 31, 2012, your RITC threshold amount is $9 million. You would continue to be a large business until June 30, 2013, and would not be a large business during the recapture period of July 1, 2013 to June 30, 2014.

If the RITC threshold amount of a person is more than $10 million at the time it becomes a GST/HST registrant, that person (and any associated person) is generally considered to be a large business and is required to begin recapturing ITCs at that time.

If a particular corporation that is a large business acquires control of another corporation that is not a large business, the other corporation (and any associated persons) is generally considered to be a large business when that control is acquired and is required to begin recapturing ITCs at that time.

If two or more corporations amalgamate and the combined RITC threshold amounts of those corporations is greater than $10 million at that time, the amalgamated corporation is generally considered to be a large business upon amalgamation and is required to begin recapturing ITCs at that time.

If a particular person that is not a large business acquires all or substantially all of the assets of another person that is a large business and continues to carry on the business of that other person, the particular person is generally considered to be a large business at the earlier of:

The particular person is required to begin recapturing ITCs on that day.

If a person becomes, or becomes related with, one of the financial institutions listed under the heading "Large business", the person is generally considered to become a large business at that time (and continue to be one until it ceases to be one of those financial institutions or ceases to be related to one), and is required to begin recapturing ITCs at that time.

Specified property and services

Generally, from the perspective of the home construction industry, specified property and services include the following if they are acquired or brought into P.E.I. by a large business for consumption or use (in whole or in part) in P.E.I. by that business:

A specified property or service that is acquired in another province or country is considered to be brought into P.E.I. if it is for use (in whole or in part) in P.E.I.

If a large business brings a specified property or service into P.E.I. for consumption or use (in whole or in part) in P.E.I. by the large business, the large business is generally required to account for the provincial part of the ITCs that are available for that bringing in of the specified property or service. The large business is also required to account for the provincial part of the ITCs that are available if the provincial part of the HST is payable for property or services brought in for consumption or use exclusively in commercial activities of the large business.

Property and services acquired in P.E.I. for consumption or use outside P.E.I. are generally not subject to the RITC requirement, other than property and services acquired for consumption or use in Ontario.

Example 4

Build Co. is a GST/HST registrant in the business of building and selling new houses and condos for sale in P.E.I., and had a total of $15 million in taxable supplies in its fiscal year ending June 30, 2013. In September 2013, Build Co. begins construction of a larger administrative office for its expanding operations.

As Build Co. is a large business for the recapture period of July 1, 2013 to June 30, 2014, it is subject to the RITC requirements for specified property and services it acquires or brings into P.E.I., including those for the construction of the new houses, condos, and administrative office.

Example 5

During its fiscal year ending March 31, 2012, a non-profit organization finished building a 100-unit seniors' residence situated in P.E.I. When the first resident moved in, the non-profit organization was deemed to have made a taxable self-supply of the residence, and the fair market value of that supply was $33 million.

As a non-profit organization is not a large business for RITC purposes regardless of the value of its taxable supplies, the RITC requirement does not apply to any of its expenses.

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

The rules for claiming ITCs on the federal part of the HST paid on these inputs are not affected.

Transitional measure – Self-assessment

If a builder that is a large business acquires a specified property or service, and the consideration for the supply first becomes due, or is paid without having become due, after November 8, 2012 and before February 2013, the builder is generally required to self-assess the provincial part of the HST for the specified property or part of the specified service to the extent that:

The builder is required to account for the provincial part of the HST:

The builder must generally recapture any ITCs available for the provincial part of the HST on the GST/HST return for the reporting period in which the ITCs first become available.

Non-arm's length transactions

If a builder that is a large business acquires a specified property or service from someone with whom they are not dealing at arm's length for no consideration, or for consideration that is less than fair market value, the builder is generally required to recapture ITCs as if the transaction had been made at fair market value, even if the property or service were acquired, or brought into the province, for consumption or use exclusively in the builder's commercial activities.

ITC recapture rates

The rate of ITC recapture is 100% for the first five years that the HST is in effect in P.E.I. and is then phased out by reducing the rate of recapture in equal increments over the following three years. The recapture rates are:

Example 6

Builder A is a GST/HST registrant with a fiscal year ending December 31. The total consideration for Builder A's taxable supplies in its fiscal year ending December 31, 2011 is $12 million.

Builder A is therefore a large business for the recapture period July 1, 2012 to June 30, 2013 as its RITC threshold amount for that recapture period is more than $10 million. However, Builder A only begins to recapture ITCs (at a rate of 100%) for reporting periods ending on or after April 1, 2013 during which time the HST is in effect.

When to account for recaptured ITCs

A builder that is a large business is generally required to account for recaptured ITCs in its GST/HST return for the reporting period in which the ITCs first become available. This is the first reporting period in which the provincial part of the HST to which the ITC relates becomes payable, or is paid without having become payable.

However, if the builder is currently required to repay ITCs for a particular specified property or service in a reporting period other than the reporting period in which the ITCs first become available, the builder is generally required, under the RITC requirement, to recapture ITCs for that same specified property or service in that same reporting period.

Example 7

A builder that is a large business is currently required to repay 50% of the ITCs that it claims for certain meal and entertainment expenses in the reporting period immediately following the end of its fiscal year. Some of the meals and entertainment are also specified property or services for RITC purposes. The builder is required to recapture the provincial part of the ITCs for those particular meal and entertainment expenses in the reporting period immediately following the end of its fiscal year, rather than in the reporting period in which the ITCs first became available.

How to account for recaptured ITCs

Restricted ITCs are "recaptured" rather than denied, so affected builders must separately identify recaptured ITCs in their GST/HST returns. A builder that must recapture ITCs would be required to file electronically using GST/HST NETFILE.

The builder calculates and reports their ITCs as follows:

Failure to account for recaptured ITCs in the proper manner generally results in interest and penalties.

Example 8

A builder that is a large business is a monthly filer that routinely acquires specified property in P.E.I. Rather than claim the ITCs for this property in the GST/HST return for the reporting period in which the ITCs first become available, the builder waits until the end of its fiscal year and claims the ITCs at that point. It also recaptures the provincial part of those ITCs at that point.

The builder would generally be subject to interest and penalties in this situation because it was required to recapture the provincial part of the ITCs in the reporting period when the ITCs first became available.

Generally, if a registrant fails to report recaptured ITCs in the proper reporting period, this is to be corrected through an amended return for that period.

Refer to GST/HST Info Sheet GI-099, Builders and Electronic Filing Requirements, for more information on mandatory electronic filing, including other circumstances under which a builder is required to electronically file a return.

Option to use an Estimation/Instalment Approach

To simplify tax compliance, a large business is generally allowed to make an election to use an estimation, instalment and reconciliation approach to accounting for recaptured ITCs, referred to here as the estimation/reconciliation method. The election must be filed with the CRA and becomes effective on the first day of the fourth fiscal month of a fiscal year of a large business as long as that fiscal year is not the first fiscal year of the large business. However, where a registrant becomes a large business on a day in a particular fiscal year, then the election would become effective on that day as long as that fiscal year is not the first fiscal year of the large business. The election applies until it is revoked. Generally, the election cannot be revoked until it has been in effect for at least one year.

Under the estimation/reconciliation method, for each province that has an RITC requirement, a large business must:

Example 9

A large business, Builder A, that is a monthly filer with a fiscal year ending on December 31, elects to use the estimation/reconciliation method beginning April 1, 2014 (the first day of its instalment period). Builder A has $8,400 of estimated RITCs for P.E.I. for its 2014 fiscal year based on the ITCs that it would have been required to recapture for the previous fiscal year if the RITC requirement had been in place throughout that year.

Builder A must divide this estimated RITC amount by the 12 monthly reporting periods within the April 1, 2014 to March 31, 2015 instalment period and report $700 in the recaptured ITCs field for P.E.I. in the GST/HST NETFILE return for each of those reporting periods.

Builder A reported $600 of actual RITCs in its GST/HST returns for January, February and March, before it began using the estimated/reconciliation method. The total amount reported for its 2014 fiscal year would be $8,100 [($600 × 3) + ($700 × 9)].

In March 2015, Builder A determines that its actual RITCs were $9,000 for its 2014 fiscal year. Builder A would report the additional $900 ($9,000 – $8,100) in its GST/HST NETFILE return for the March 1 to 31, 2015 reporting period (in addition to the $700 instalment payment for that same reporting period).

If the HST is only in effect for part of your fiscal year, the actual RITC amount for that fiscal year is to be adjusted to reflect the portion of the fiscal year during which the HST was in effect.

Therefore, under the estimation/reconciliation method, a builder that is a large business must still identify the specified property and services that it acquires or brings into P.E.I. in such a way that it can determine the actual amount of available ITCs that are subject to the RITC requirement. However, this approach allows the builder to account for these recaptured ITCs on an annual basis and on the basis of complete financial information.

A builder that is a large business is generally able to elect to use the estimation/reconciliation method before the proposed introduction of the HST in P.E.I. on April 1, 2013.

This info sheet does not replace the law found in the Excise Tax Act (the Act) and its regulations. It is provided for your reference. As it may not completely address your particular operation, you may wish to refer to the Act or appropriate regulation, or contact any CRA GST/HST rulings office for additional information. A ruling should be requested for certainty in respect of any particular GST/HST matter. Pamphlet RC4405, GST/HST Rulings – Experts in GST/HST Legislation explains how to obtain a ruling and lists the GST/HST rulings offices. If you wish to make a technical enquiry on the GST/HST by telephone, please call 1-800-959-8287.

If you are located in Quebec and wish to make a technical enquiry or request a ruling related to the GST/HST, please contact Revenu Québec at 1-800-567-4692. You may also visit the Revenu Québec Web site to obtain general information.

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

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