In these times of gloomy income tax announcements, there’s good news on the horizon for the QST.
Indeed, as announced in the 2015-2016 provincial budget, Revenu Québec will be phasing out restrictions on input tax refunds (“ITRs”) for large businesses. For clarification purposes, a business is considered a large business, in the QST regime, when its total taxable sales made in Canada, as well as those made by companies associated with it, exceed $10 million per fiscal year.
As a result, as of January1, 2018, large businesses will be able to recover 25% of the QST paid on expenses they have incurred that are covered by the ITR restrictions set out in section 206.1 of the Act respecting the Québec sales tax, including:
- road vehicles weighing less than 3,000 kilograms that must be registered under the Highway Safety Code to operate on public roads;
- goods and services related to the above-mentioned vehicles that are acquired or brought to Quebec within 12 months of the vehicles’ acquisition or arrival in Quebec;
- fuel used to power such road vehicles (excluding diesel);
- electricity, gas, steam and fuels (other than in the production of goods for resale);
- telephone and other telecommunications services (excluding 1-800 and Internet services);
- food, beverages and entertainment, the deductibility of which is limited to 50% under the Income Tax Act.
This gradual abolition of ITR restrictions will be phased in over the next four years: the ITR recovery percentage for the above expenses will rise to 50% on January1, 2019, to 75% on January1, 2020, and to 100% on January1, 2021.
This measure will bring its share of complexities for companies, in terms of the particularities applicable to certain expenses, administrative management and the supporting documents to be kept to justify partial recovery of ITRs.
The following is a non-exhaustive list of particularities and changes that will have an impact on the calculation of ITR:
Road vehicles and passenger cars
A large company will now be able to claim an ITR on the acquisition and lease of a road vehicle weighing less than 3,000 kg at the prescribed recovery rate. However, it is important to note that the general restrictions on ITRs will continue to apply, notably the $30,000 value limit for passenger vehicles. In fact, when acquiring a passenger vehicle, a registrant with large business status will still be limited to an ITR calculated on a value not exceeding $30,000.
For example, if a large company acquires a passenger vehicle for $50,000 on January 2, 2018, the ITR to which it will be entitled will be determined according to the following calculation:
In the case of a leased vehicle, the rules are different. Although the lease may have been entered into before January1, 2018, an ITR may be claimed for monthly payments for a period beginning after that date, subject to the applicable limit for the deduction allowed in computing income under the Taxation Act.
If a large company leases a passenger vehicle on July 8, 2017 for a period of 4 years with tax-deductible monthly payments of $530 before taxes, an ITR on each payment can be claimed based on the following calculation:
It’s important to note that when a large company trades in a vehicle at a dealership, the value on which tax is calculated may be reduced if certain conditions are met. This reduction in value corresponds to the credit granted by the supplier for another vehicle, which he accepts in total or partial exchange.
This rule will apply until December 31, 2020, in circumstances where the road vehicle given in trade-in did not qualify for any ITRs due to restrictions on obtaining an ITR.
In the event that the vehicle traded in at the dealership by a large company has been subject to a partial or total ITR as of 2018 on that traded-in vehicle, this measure cannot be applied and the reduction in value cannot be made by the supplier.
For example, if a large company owns a vehicle valued at $5,000 (for which it did not recapture any ITR at the time of the original purchase) that it wishes to exchange, on August 31, 2018, for another vehicle valued at $25,000 before taxes, the following calculations will have to be performed:
It’s important to know that after December 31, 2020, large companies will be subject to the same rules as other registrants when it comes to vehicle trade-ins, i.e. the transaction must be treated as two separate supplies: the sale of the vehicle to the dealer by the registrant, and the purchase of the new vehicle by the registrant from the dealer.
Finally, the new measures include changes for car dealers who qualify as a large business and use vehicles as demonstrators or for purposes other than resale. In this case, the registrant who is a large business must remit to the tax authorities, for each month in which a vehicle is used for another purpose, 2.5% of the QST calculated on the value of the vehicle. As of January1, 2018, the registrant must continue to remit this amount of QST, but will be eligible for an ITR at 25%, 50% or 75% of the QST paid, depending on the year covered by the transaction. This provision will remain valid until December 31, 2020.
Other goods and services
With respect to food, beverage and entertainment expenses, a large company will be eligible for an ITR calculated on the limited amount of 50%, as provided for under applicable legislation.
Therefore, for an entertainment expense of $125 (before taxes) incurred on March 3, 2018, the calculation of eligible ITR will be as follows:
We wish to clarify the situation of corporate groups that have filed an election to treat certain taxable supplies between specified members of a qualifying group as made for no consideration (commonly referred to as a “closely related persons election”). This election is intended as a relief measure for corporate members of a qualifying group, who are then not required to charge GST and QST on supplies made between them. However, this election does not apply to property or services acquired by a business that would be unable to claim an ITR due to ITR restrictions for large businesses. Under the phase-out of ITR restrictions, the recipient of such a supply will be required to pay QST to its supplier, and will be entitled to an ITR at the rate of 25%, 50% or 75%, depending on the year of the supply in question.
We invite you to contact us if you have any questions about this important change, or if you would like to ensure that your company recovers its ITRs optimally under these new rules.
Sylvie Therrien, Commodity Tax Manager
Estelle Rancourt, Senior Consumption Tax Consultant
Amyot Gélinas, s.e.n.c.r.l.
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