After much anticipation, Revenue Quebec (“RQ”) has released details on the new QST Factor Method, available for use effective January 1, 2014, by publishing TVQ 212-4. At the same time, they have, for the fifth time, revised the existing TVQ 212-1/R5, “Simplified Calculation Methods for Input Tax Refunds in Respect of Expense Reimbursements,” with more details on the contentious concept of “personal expenses.”
In the revised bulletin, four new paragraphs have been included with examples of personal and non-personal expenses. The current large business (“LB”) simplified method, with a factor of 5%, may be applied to personal expenses included on an employee expense report, if the organization qualifies and has chosen to use the method for the year in question. The LB simplified method is not available to be used for non-personal expenses. According to RQ, non-personal expenses included on an employee’s expense report must meet full documentary requirements instead. This has presented a problem for many large businesses using the LB simplified method to calculate input tax refunds (“ITR”), as many of the items considered to be non-personal are also subject to the large business restrictions on ITRs. Once an expense is categorized as non-personal, it must adhere to full documentary requirements, and again becomes subject to the LB restrictions, and therefore no ITRs are available. Many recent audit assessments have included this particular issue. As a reminder, the LB simplified method may only be applied to employee expenses incurred before January 1, 2014.
For businesses preparing for the new year, RQ has provided basic guidelines for those opting to use the QST Factor Method, modelled after the GST/HST Simplified Factor Method available for GST/HST input tax credits on employee reimbursements and allowances. The new bulletin explains that while the main components of the new administrative policy concerning QST ITRs and employee reimbursements and allowances will follow the aspects outlined in GST/HST Memorandum 9.4, “Reimbursements” and GST/HST Memorandum 8.4, “Documentary Requirements for Claiming Input Tax Credits”, some differences will still exist. These include:
- factors of 9/109 for eligible reimbursements and 9.975/109.975 for eligible allowances will apply;
- all or substantially all of the expenses must be expenses relating to taxable supplies, other than zero-rated supplies, of property or services acquired by an employee in Quebec;
- small and medium-sized businesses are subject to a limit on entertainment expenses that varies between 1.25% and 2% of their gross revenue, pursuant to section 457.1.4 of the Act respecting the Quebec sales tax (“AQST”); and
- large businesses must respect the ITR restrictions under section 206.1 of the AQST.
Moving to a method that is essentially in line with the Canada Revenue Agency’s administrative policy on employee reimbursements and allowances is congruent with RQ’s harmonization efforts. In addition, it enables them to restrict more expenses incurred by employees of large businesses without having to play the “non-personal expense” card. With the promise to eliminate the large business ITR restrictions by 2021, the timing of this change is paramount.
Large businesses will need to make changes to their systems and/or expense reports to ensure that the new factors are incorporated for employee expenses incurred on or after January 1, 2014, with special attention to restricted items, such as meals and entertainment, for which no ITRs will be available.