News and Insights

Changes to the QST Simplified Method for Large Businesses 

Tax Development Oct 18, 2013

Revenue Quebec has officially announced that it will eliminate the simplified method currently available to large businesses (LBs) for claiming input tax refunds (ITRs) on employee expense reimbursements and allowances, effective January 1, 2014. This announcement had been highly anticipated since the decision to make this change was publicized at recent tax conferences. 

In a move to further harmonize the QST with the GST, the province will adopt the GST/HST system’s simplified factor method for the recovery of tax on employee expense reimbursements.  The LB simplified method, which currently allows large businesses to claim 5% (previously 4.1% and then 4.5%) of expenses reimbursed and allowances paid to employees through expense reports as ITRs (subject to numerous conditions), will be replaced by the new “QST factor method”, which will be available to all businesses in Quebec, regardless of size.  This change in simplified methods will force large businesses to account for the ITR restrictions on certain types of expenses paid through employee reimbursements and allowances.

Highlights of the changes announced by Revenue Quebec include:

  • As of January 1, 2014, the LB simplified method (5%) will no longer be available to recover QST on expense reimbursements or allowances paid to employees through expense reports;
  • As an alternative to claiming ITRs based on the actual amount of QST paid on employee reimbursements (and meeting the general documentary requirements), businesses will be entitled to claim an ITR equivalent to 9/109 of the amount reimbursed to employees;
  • To use the QST factor method, at least 90% of the reimbursed expenses must relate to taxable, other than zero-rated, supplies of property or services in Quebec;
  • For employee allowances, an ITR calculated using a factor of 9.975/109.975 of the amount paid to an employee may be claimed, subject to certain conditions;
  • Small and medium businesses will be subject to a limit on entertainment expenses varying between 1.25% and 2% of gross revenue; and
  • Large businesses will be subject to the ITR restrictions in place for these organizations on employee reimbursements and allowances.    

As a result of these changes, large businesses will generally not be permitted to claim ITRs, using either the actual or QST factor method, for QST paid on the following restricted expenses:

  • Food, beverage and entertainment expenses;
  • Telecommunication services;
  • Electricity, gas, steam and other combustibles not used in manufacturing or farming;
  • Licenced road vehicles weighing under 3,000 kilograms (including associated parts and certain services); and
  • Fuel for licenced road vehicles (as described above).  

For these purposes, a large business is generally a business, including members of an associated group, with annual taxable sales (including zero-rated sales) in excess of $10 million.  Certain financial institutions are also considered to be large businesses.   

The new QST factor method will function in a manner similar to the GST/HST simplified factors currently in place (i.e., 4/104 for GST purposes, and 12/112, 13/113 or 14/114 for HST purposes, depending on the province).   

If the GST/HST simplified factors are used, they must be used for an entire fiscal year and must be applied consistently within each category of reimbursed expenses.  These factors cannot be used to “cherry pick” GST/HST for input tax credit (ITC) purposes where particular invoices or receipts do not meet the documentary requirements.  Nor may the factors be used inconsistently from employee to employee, depending on the degree of documentation provided by particular individuals.  It is expected that these conditions will also apply to the new QST factor method.   

For further information on the use of the GST/HST simplified factor and the waiver of the documentary requirements, Revenue Quebec has referred taxpayers to the Canada Revenue Agency’s GST/HST Memoranda 9.4, “Reimbursements”, and 8.4, “Documentary Requirements for Claiming Input Tax Credits.”  

Two useful tables showing examples of ITRs available to businesses for QST paid in relation to reimbursements and allowances on or after January 1, 2014 are included in the Revenue Quebec Tax News document.

Revenue Quebec has also indicated that new interpretation bulletins are scheduled to be issued on this matter later in the year.