The province has issued this notice to provide details on the temporary restrictions on input tax credits (ITCs) that will apply to certain supplies used by large businesses, including financial institutions, in the course of their commercial activities. These restrictions, referred to in the Notice as the recapture of input tax credits (RITC) requirement or recaptured ITCs, will be temporary during the initial implementation of the HST on July 1, 2010, and will only apply to the British Columbia portion (7 percent) of the HST.
The restrictions will generally apply to the following goods and services acquired for use in British Columbia by a large business or financial institution:
- road vehicles weighing less than 3,000 kgs, registered for use on public highways;
- energy, other than energy used in the production of tangible personal property for sale;
- telecommunication services, with the exception of internet access, web-hosting or toll-free services; and
- meals and entertainment expenses subject to the 50% Income Tax Act restrictions.
British Columbia has elected to implement a point of sale rebate for fuel, and therefore, unlike in Ontario, there will not be a temporary input tax credit restriction on the provincial component of the HST paid in respect of fuel.
The RITC requirement will not generally apply to goods or services acquired by a large business for purposes of re-supply. For example, a motor vehicle dealer would not be restricted from claiming the full ITC (12 percent in British Columbia) on the purchase of a specified road vehicle for resale purposes. However, if a person acquires a specified motor vehicle, but uses that vehicle before reselling it (e.g., a dealership demo), a large business would be required to recapture a portion of the ITCs claimed when the vehicle was acquired. For each month, or part thereof, the large business uses the vehicle, it must recapture 2 percent of the provincial component of the ITC attributable to the cost of the vehicle.
A large business would be required to report the gross ITCs, which represent the ITCs and adjustments a registrant is entitled to claim before taking into account any ITC recapture, in a separate information field on a schedule to the GST/HST NETFILE return. In addition, the amount of recaptured ITCs would be reported in the appropriate information field – one field for recaptured ITCs for the provincial component of HST in Ontario and one for British Columbia. The recapture must be reported in the period in which HST became payable, and any failure to report recaptured ITCs must be corrected through an amended return.
In order to simplify compliance with the RITC requirement, certain factors (referred to as proxies) have been established which, subject to certain conditions, may be used to determine what portion of the specified supply acquired for use in British Columbia is not subject to the ITC recapture.
Proxies will be available for large businesses in the following areas:
- production proxy to determine the portion of specified energy considered to be used in the production of tangible personal property for sale (election must be filed);
- scientific research and experimental development (SR&ED) activities proxy to determine energy used directly in qualifying SR&ED activities; and
- specified telecommunications services proxy, where an invoice includes both specified telecommunication services and other services (e.g., Internet access) and/or goods (e.g., telecom equipment rental), and the portion of the HST subject to recapture cannot readily be determined.
British Columbia has announced one proxy for specified telecommunication services, versus three different percentages announced by Ontario, which are based on the mix of telecommunication related goods and services. In British Columbia, if the supply covered by an invoice includes specified telecommunications services and other services and/or goods, then 5 percent of the consideration is deemed attributable to the other services and/or goods, and is not subject to the ITC restrictions.
An option is available for large businesses to help simplify compliance with the RITC requirement. A large business may generally make an election to use an estimation, installment and reconciliation approach to account for the recapture of ITCs. The election must be filed with the CRA after the end of the registrant’s fiscal year and would apply for at least one year.
If a large business elects to use the estimation, installment and reconciliation approach, the registrant would:
- estimate the amount of recaptured ITCs for the fiscal year, based on the RITC requirement during its most recently completed fiscal year, along with any RITC requirement anticipated due to business changes from the previous fiscal year;
- make installment payments in each reporting period based on the estimate of recaptured ITCs; and
- at the end of the fiscal year, reconcile any differences between the estimated and actual amount of recaptured ITCs during the year, and report this amount on the GST/HST return for the period ending three months after the fiscal year end.
For more details on the ITC recapture reporting requirements, please refer to:
BC HST Notice No. 4