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

GST/HST Info Sheet GI-165
April 2013

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.

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:

• begins immediately after June 30 of a particular calendar year and ends immediately before July 1 of the following calendar year, and
• occurs during the period that the RITC requirement would be in effect (April 1, 2013 to March 31, 2021).

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

• the person has total taxable revenues (RITC threshold amount) of more than $10 million in its last fiscal year that ended before the recapture period, or
• the person is one of the following financial institutions, or a person that is related (for purposes of the GST/HST) to one of the following financial institutions:
  • a bank;
  • a credit union;
  • 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;
  • an insurer or any other person whose principal business is providing insurance under insurance policies;
  • a segregated fund of an insurer, or
  • an investment plan.

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.

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:

• taxable supplies made in Canada, and
• taxable supplies made outside Canada through a permanent establishment in Canada.

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 amount by which the consideration for a supply is reduced because of goods given as a trade-in;
• the value of supplies made between closely related corporations that elected for GST/HST purposes to otherwise treat the supplies as being made for nil consideration; and
• the fair market value of a supply made between persons not dealing at arm's length for less than its fair market value.

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

• the value of GST/HST or certain provincial levies (such as the provincial sales tax);
• the value of the sale of capital real property;
• the value of any supplies of financial services; and
• the value of any goodwill supplied as part of the supply of a business.

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.

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.

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 day that it begins to carry on the business, and
• the day that it acquires substantially all of the assets.

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:

• electricity, gas, steam, and fuel (other than fuel for use in a propulsion engine) together with incidental delivery charges or regulatory fees (such properties, consumed or used in the construction of housing, would be specified property of a builder);
• telecommunication services, other than Internet access services, Web hosting services or toll-free telephone services such as 1-800 telephone services;
• food, beverages and entertainment, to the extent that they are already subject to the existing ITC repayment requirements (generally 50%);
• road vehicles weighing less than 3,000 kilograms that are required to be licensed for use on a public highway under the laws of P.E.I. (whether purchased or acquired by way of lease, licence or similar arrangement), along with parts and services acquired within 12 months of the vehicle's acquisition or bringing into P.E.I. (e.g., acquisition and installation of a vehicle anti-theft system), other than parts and service for routine repair and maintenance; and
• fuel (other than diesel fuel) that is for the engine of a road vehicle described above even if the vehicle was acquired or brought into P.E.I. prior to April 1, 2013.

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.

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 specified property is delivered, and ownership of the property is transferred, to the builder on or after April 1, 2013, or
• part of the specified service (more than 10%) is performed on or after April 1, 2013.

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

• in the builder's GST/HST return for the reporting period that includes April 1, 2013, if the due date for that return is before August 1, 2013, and
• in any other case, by completing and filing Form GST489, Return for Self-assessment for the Provincial Part of Harmonized Sales Tax (HST) and paying the amount before August 1, 2013.

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:

• 100% for the period from April 1, 2013 to March 31, 2018,
• 75% for the period from April 1, 2018 to March 31, 2019,
• 50% for the period from April 1, 2019 to March 31, 2020,
• 25% for the period from April 1, 2020 to March 31, 2021, and
• 0% on or after April 1, 2021.

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.

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:

• The amount of gross ITCs and adjustments is reported in a separate information field on Schedule B to the GST/HST NETFILE return. This is the amount of all ITCs and adjustments that a registrant is entitled to claim before taking into account any recaptured ITCs.
• The amount of the  ITCs for the provincial part of the HST in P.E.I that is subject to recapture is reported in a separate information field on Schedule B. This amount is automatically multiplied by the applicable recapture rate for the period.
• The net amount of ITCs and adjustments after recapture is automatically calculated by deducting recaptured ITCs from gross ITCs and is reported in an information field on the schedule. This net amount can be claimed as an ITC in the GST/HST NETFILE return.

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

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:

• estimate the amount of ITCs it is required to recapture during a fiscal year (this amount cannot be less than the actual amount of ITCs it was, or would have been, required to recapture in its previous fiscal year);
• based on this estimate, make equal instalment payments of recaptured ITCs in each reporting period during a one-year period (the "instalment period") that begins three months after the beginning of the fiscal year and ends three months after the end of the fiscal year;
• at the end of the fiscal year, determine the actual amount of ITCs it was required to recapture during that year for each province with an RITC requirement; and
• report any differences between the estimated and actual amounts in its GST/HST return for a reporting period that includes a date that occurs within three months after the end of its fiscal year.

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.

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