Canada: Ontario Phase-Out Of Recaptured Input Tax Credits

Executive Summary

The requirement for certain large businesses to recapture the provincial portion of Ontario HST claimed as Input Tax Credits (ITCs) in respect of specified property and services will be phased out, starting July 1, 2015.

The Canada Revenue Agency ("CRA") recently released GST/HST Info Sheet GI-171, Phasing out of Recaptured Input Tax Credits in Ontario. The CRA Info Sheet provides guidance to explain the process and requirements for certain large businesses to Recapture Input Tax Credits (RITCs).

The purpose of this tax article is to provide a brief background and discussion of significant considerations in respect of the RITC reporting requirements.

Background

Typically businesses with taxable and zero-rated revenues that exceed $10 million on an associated group basis in the previous fiscal year are required to report RITCs in respect of the provincial portion of the Ontario HST paid or payable on specified property and services in their GST/HST returns.

Generally-speaking, the RITC requirements apply in respect of specified property and services, including specified road vehicles, energy, telecommunication services, and meals and entertainment expenses.

RITCs must be reported on Schedule B – Calculation of Input Tax Credits of the GST/HST Netfile return, regardless of whether the related ITCs have been claimed. Noteworthy, RITCs cannot simply be netted against the related ITCs.

Failing to recapture ITCs in the manner required by the CRA and in the appropriate reporting period can result in the CRA assessing penalties and interest.

Rate of ITC Recapture and Phase-Out Period

The GST/HST came into effect in Ontario on July 1, 2010. For the first five years of the HST, the recapture rate has been 100%. Effective July 1, 2015, the recapture rate has decreased to 75% and will subsequently be phased out at 25% per year until the Ontario recapture requirement is completely eliminated on July 1, 2018. The following table summarizes the phase-out of the ITC recapture for Ontario:

Reporting of RITCs

Generally-speaking, large businesses are required to report RITCs in the same return in which they are entitled to claim an ITC on the specified property or service, even if the ITC has not yet been claimed. Accordingly, businesses are required to track the period in which they were entitled to claim a particular ITC in order that the associated RITC will be reported at the correct recapture rate.

During the phase-out period of RITCs in Ontario, businesses will continue to report their RITCs on Schedule B of their online GST/HST Netfile return. However, Schedule B will be modified to include additional lines for each applicable recapture period. Specifically, if a GST/HST reporting period straddles any of the periods contained in the above table, there may be a requirement to report RITCs at multiple rates.

GST/HST Info Sheet GI-171 includes numerous examples of scenarios which straddle the July 1 transition date to assist taxpayers in complying with their RITC compliance obligations.

The Bottom Line

Large businesses that have incurred Ontario HST on specified property and services must take appropriate steps to ensure that their accounting processes and systems are able to properly track their expenditures. Specifically, businesses must ensure that their systems correctly track when Ontario HST is paid or payable in respect of specified property and services, and thus eligible to be claimed as an ITC, and to ensure that the related RITC is recaptured at the correct rate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.