Ryan Tax Review

It’s Here! The Long-awaited Phase-out of ITR Restrictions for Large Businesses

If you are familiar with the phase-out of recaptured input tax credits, currently in its last year in Ontario, then you will likely be fairly comfortable tackling the phase-out of the QST input tax refund (ITR) restrictions in Quebec.

Beginning January 1, 2018, the ITR restrictions for “large businesses”1 related to QST paid on specific types of expenditures will gradually disappear over a three-year period, resulting in increased cost savings for organizations registered for the tax. Although this is a welcome change for large businesses operating in Quebec, there are some potential issues worth noting in Revenu Québec’s recently released interpretation bulletin regarding the phase-out.2

ITR Restrictions

Before discussing the specifics of the phase-out, it’s worth reviewing how these ITR restrictions generally apply, as well as the basic rules for the phase-out. Since their introduction in 1993, QST paid by registrants that are considered to be large businesses is not eligible for an ITR where the tax is paid in relation to the following types of property or services:

  • road vehicles of less than 3,000 kg that must be registered under the Highway Safety Code (or under the laws of another jurisdiction) to travel on public highways;
  • gasoline used to power the engine of a licensed road vehicle, as described above;
  • any property or service (i.e., an improvement) relating to such a road vehicle that is acquired or brought into Quebec within 12 months after the vehicle was acquired or imported;
  • electricity, gas, combustibles or steam used for a purpose other than to produce movable property intended for sale;
  • telephone and other telecommunication services, except for toll-free and Internet services; and
  • food, beverages or entertainment that would be subject to deductibility limitations under the Taxation Act (Quebec).

These restrictions not only apply to payments made directly to suppliers by large businesses, but also to allowances and reimbursements paid to employees by large businesses in relation to these expenditures (see the “Employee Allowances and Reimbursements” section below for more information).

Phase-out Period

As announced under an agreement to further harmonize the QST with the GST in 2013, the ITR restrictions will be phased out starting on January 1, 2018, resulting in the following percentages of ITRs becoming available to large businesses for QST paid in relation to restricted categories of expense during, and after, the 3-year phase-out period:

  • 25% of QST paid from January 1, 2018 to December 31, 2018;
  • 50% of QST paid from January 1, 2019 to December 31, 2019;
  • 75% of QST paid from January 1, 2020 to December 31, 2020; and
  • 100% of QST paid on January 1, 2021 and thereafter.

The phase-out percentage to be applied to an ITR claim for QST paid on a particular expenditure will depend on the payable date for the property or service acquired. For purchases of property or services, this will generally be the invoice date. For property acquired otherwise than by way of sale (i.e., by way of lease, license, rental, etc.), the period in which each lease/license/rental interval begins will dictate the applicable phase-out percentage.

Although determining ITR entitlement for many transactions will be fairly straightforward, there are certain types of transactions that may require additional attention from large businesses. Discussion on some of these areas, along with situational examples, can be found below.

Employee Allowances and Reimbursements

(Examples 2 and 4)
Deemed QST paid on employee allowances is calculated by applying a factor of 9.975/109.975 to the total amount of allowance paid. On employee reimbursements, ITRs are calculated either by taking the actual QST paid, based on the supporting documentation provided by the employee for the expenditure, or by applying the simplified factor of 9/109 to the total amount reimbursed. The method selected by a large business for claiming ITRs on employee reimbursements must be applied consistently for each category of expense in a fiscal year. For example, if the simplified factor is used to determine ITRs on cell phone reimbursements to an employee, it must be applied to all employee reimbursements for cell phone expenses in the fiscal year.

Employee allowances and reimbursements related to a property or service that is subject to the ITR restrictions will be eligible for ITRs at the applicable rate during and after the phase-out period. Note that reasonable mileage allowances (deemed not to be taxable benefits for income tax purposes) paid to employees are generally subject to the ITR restrictions, as these payments are considered to relate to the use of a licensed road vehicle and the gasoline used in such a vehicle.

Meals and Entertainment

(Examples 3 and 4)
ITRs for QST paid on the purchase of meals and entertainment have always been subject to the 50% restriction, which is based on the limitation on the deductibility of these expenses for income tax purposes under the province’s Taxation Act.3 However, until January 1, 2018, this restriction had no significance for large businesses, since ITRs on meals and entertainment expenses were fully restricted prior to this date.

Beginning on January 1, 2018, the allowable ITR that may be claimed during and after the phase-out period will remain subject to the 50% restriction for meals and entertainment, resulting in the following allowable percentages for ITR claims by large businesses related to those expenses:

  • 12.5% (25% x 50%) of QST paid in 2018;
  • 25% (50% x 50%) of QST paid in 2019;
  • 37.5% (75% x 50%) of QST paid in 2020; and
  • 50% (100% x 50%) of QST paid in 2021 and thereafter.

Note that meals and entertainment expenses which are not subject to the 50% limitation under the Taxation Act are not subject to the ITR restrictions for large businesses.

Road Vehicles

Prior to 2018, road vehicles subject to the ITR restrictions were not considered passenger vehicles4 or capital property.5 However, on or after January 1, 2018, these vehicles may be considered passenger vehicles and/or capital property. This is pertinent because special rules related to maximum ITR entitlements apply to passenger vehicles. In addition, vehicles treated as capital property (generally vehicles that are not part of an inventory) will follow any applicable change-in-use rules as of that date.

Passenger vehicles
(Examples 5 to 10)

On the acquisition of passenger vehicles, ITRs are limited to a maximum dollar amount, depending on whether the vehicle is purchased or leased. Where a vehicle is purchased, an amount no more than the QST paid on $30,000 for the vehicle (and related improvements) can be claimed as an ITR.6 For vehicle leases, the ITR is limited to the QST paid on up to $800 per month.7 Therefore, based on the current QST rate of 9.975%, the maximum ITR that will be allowed to large businesses on the purchase or lease, respectively, of a passenger vehicle during and after the phase-out period is as follows:

  • $748.13 (i.e., where purchased) or $19.95 per month (i.e., where leased) in 2018;
  • $1,496.25 or $39.90 per month in 2019;
  • $2,244.38 or $59.85 per month in 2020; and
  • $2,992.50 or $79.80 per month on or after January 1, 2021.

Note that not all road vehicles qualify as passenger vehicles. Vehicles that are commonly referred to as vans or pick-up trucks may not be considered passenger vehicles8 and, therefore, would not be subject to the limitations discussed above. This could be the case even if the vehicles in question are subject to the ITR restrictions for large businesses.

In addition, large businesses may be able to claim ITRs related to the sale of a used passenger vehicle that was purchased on or after January 1, 2018.9 This relief allows a large business to claim a portion of previously unclaimed ITRs (due to the application of the maximum ITR limits for passenger vehicles or the ITR restrictions for large businesses) based on the basic tax content of the used vehicle, its selling price, and the phase-out percentage applicable at the time of the sale. This relief, however, is not available for vehicles subject to the ITR restrictions and purchased by a large business prior to 2018, even if such vehicles are sold on or after January 1, 2018.

Capital property
(Example 11)

Under the change-in-use rules for capital property, QST must be remitted on property that was previously eligible for ITRs (i.e., used primarily in commercial activities), but is subsequently used in activities that do not give rise to ITRs (i.e., not used primarily in commercial activities). Where this change-in-use occurs on a road vehicle that is acquired on or after January 1, 2018, QST must be remitted based on the ITR amount claimed at the time the vehicle was acquired. For example, if a vehicle that is used primarily in commercial activities was acquired in 2018 and therefore, 25% of the QST paid was claimed as an ITR under the phase-out rules, the QST remittance on this vehicle would be based on the ITR amount previously claimed (i.e., 25% of the QST paid) where it is no longer used primarily in commercial activities subsequent to the date of acquisition.

In addition, where a large business was not required to apply the ITR restrictions on a particular road vehicle prior to January 1, 2018 (i.e., purchased for resale), but subsequently uses that vehicle in activities that would be subject to the ITR restrictions for large businesses, QST is required to be remitted, due to the ITR restrictions in effect at the time that use changes. These remittances will continue to be required from January 1, 2018 to December 31, 2020.

Vehicle trade-ins
(Example 12)

In the event that a large business trades in a used road vehicle that was subject to the full ITR restrictions (i.e., acquired prior to 2018) for credit toward the acquisition of another vehicle, QST is generally only payable on the net price for the new vehicle (i.e., the purchase price of the new vehicle less the value of the trade-in).10 However, this relief will disappear for trade-in vehicles purchased by large businesses on or after January 1, 2018, since ITRs for at least a portion of the QST payable on these vehicles will be available as of that date. As a result, a large business will be required to collect and remit the applicable QST on the value of the trade-in, and pay QST on the full purchase price of the newly acquired vehicle. The ITR phase-out percentage for QST paid on the new vehicle will apply to any ITR claims, based on the date of acquisition.

Employee Taxable Benefits

Since partial ITRs may be claimed on property or services which are subject to the ITR restrictions as of January 1, 2018, any taxable benefits conferred on employees or shareholders of a large business in relation to such property or services will result in a required QST remittance, based on the value of these benefits. The amount of QST to be remitted will depend on the phase-out percentage in effect when the taxable benefit is provided. For example, if a taxable benefit is provided during 2019, 50% of the QST calculated on the value of the benefit must be remitted to Revenu Québec.

Incidental Supplies

Large businesses purchasing property or services which include at least one other incidental property or service that is subject to the ITR restrictions must apply the restriction to that portion of the purchase.

Impact of Elections

There are a number of elections that provide QST relief to registrants under certain situations. For example, elections are available for:

  • purchasing all or substantially all of the assets of a business;11
  • supplies between closely-related entities;12 and
  • property and services acquired by an operator of a joint venture.13

The QST relief provided by these elections will continue to not apply to purchases of property or services that are subject to the ITR restrictions during the phase-out period. However, once the ITR restrictions are completely phased out in 2021, these elections will be available in respect of such purchases.

Reporting

Contrary to the treatment of HST recaptured input tax credits in Ontario and Prince Edward Island, there are no special reporting requirements for the QST ITR restrictions. A large business should simply claim the allowable ITRs, based on the applicable phase-out percentage for the relevant period, using line 206 of its QST Return.

Summary

Clearly, large businesses must be cognizant of the differences in ITR treatment for QST paid in relation to property and services subject to the ITR restrictions prior to 2018, during the phase-out period from 2018 to 2020, and subsequent to the phase-out. While ITRs will become available in respect of previously restricted types of expenses, specific rules in the legislation can complicate the claiming of ITRs for large businesses. Therefore, it is important for large businesses to implement processes to identify situations where QST remittances may be required or ITR limitations still exist in order to minimize QST liability exposure.

All in all, large businesses will soon begin to reap the benefits of higher ITR claims, but these changes can also create potentially precarious tax situations for organizations, especially where proper measures have not been taken to mitigate the risks.

Examples

Example 1: Basic calculation on purchases (excludes purchases of meals and entertainment or licensed road vehicles)

A large business purchases one of the following items subject to the ITR restrictions:

  • gasoline used in licensed road vehicles subject to the ITR restrictions;
  • electricity, gas, combustibles or steam; or
  • telecommunication services.

The cost of the property or service is $1,000, plus GST of $50 and QST of $99.75.

The allowable ITR will be based on the applicable ITR restriction phase-out percentage for the period, as follows:

  • if purchased in 2018, then the available ITR = $99.75 x 25% = $24.94;
  • if purchased in 2019, then the available ITR = $99.75 x 50% = $49.88; and
  • if purchased in 2020, then the available ITR = $99.75 x 75% = $74.81.

Example 2: Basic calculation on allowances and reimbursements paid to employees (excludes purchases of meals and entertainment or licensed road vehicles)
This would apply where a large business pays an allowance to, or reimburses, an employee for one of the restricted categories of expense, including:

  • gasoline used in a licensed road vehicle subject to the ITR restrictions (including a reasonable per kilometre allowance); and
  • telecommunication services.

If the total amount of the allowance is $100, or the reimbursement is for $92.21 ($80.20 plus $4.01 GST and $8.00 QST), then the allowable ITR would be calculated as follows, depending on the year of payment:

Allowance:

  • 2018 – $100 x 9.975/109.975 x 25% = $2.27 ITR
  • 2019 – $100 x 9.975/109.975 x 50% = $4.54 ITR
  • 2020 – $100 x 9.975/109.975 x 75% = $6.80 ITR

Reimbursement:

Using actual tax paid

  • 2018 – $8.00 x 25% = $2.00 ITR
  • 2019 – $8.00 x 50% = $4.00 ITR
  • 2020 – $8.00 x 75% = $6.00 ITR

Using simplified factor

  • 2018 – $92.21 x 9/109 x 25% = $1.90 ITR
  • 2019 – $92.21 x 9/109 x 50% = $3.81 ITR
  • 2020 – $92.21 x 9/109 x 75% = $5.71 ITR

Example 3: Meals and entertainment purchase

A large business purchases a meal which is subject to the ITR restrictions. The cost of the meal is $1,000, plus GST of $50 and QST of $99.75.

While an ITR may be claimed by a large business on this type of expense, beginning on January 1, 2018, the 50% restriction still applies when determining the available ITR. The allowable ITR is calculated as follows if the meal is purchased in one of the following three years:

  • 2018 – $99.75 x 50% x 25% = $12.47 ITR
  • 2019 – $99.75 x 50% x 50% = $24.94 ITR
  • 2020 – $99.75 x 50% x 75% = $37.41 ITR

Example 4: Meals and entertainment paid as an allowance and reimbursement to an employee

A large business pays an allowance to, or reimburses, an employee for meals and entertainment that is subject to the ITR restrictions. The total amount of the allowance is $100, or the reimbursement is for $100 (including GST of $4.01, QST of $8.00, and tip of $7.79).

The allowable ITR will be calculated as follows, where the meal allowance or reimbursement is paid in one of the following three years:

Allowance:

  • 2018 – $100 x 9.975/109.975 x 50% x 25% = $1.13 ITR
  • 2019 – $100 x 9.975/109.975 x 50% x 50% = $2.27 ITR
  • 2020 – $100 x 9.975/109.975 x 50% x 75% = $3.40 ITR

Reimbursement:
Using actual tax paid

  • 2018 – $8.00 x 50% x 25% = $1.00 ITR
  • 2019 – $8.00 x 50% x 50% = $2.00 ITR
  • 2020 – $8.00 x 50% x 75% = $3.00 ITR

Using simplified factor

  • 2018 – $100 x 9/109 x 50% x 25% = $1.03 ITR
  • 2019 – $100 x 9/109 x 50% x 50% = $2.06 ITR
  • 2020 – $100 x 9/109 x 50% x 75% = $3.10 ITR

Example 5: Purchase of a road Vehicle under $30,000

A large business purchases a road vehicle that is subject to the ITR restrictions. The cost of the vehicle is $28,000, plus GST of $1,400 and QST of $2,793.

The allowable ITR will be calculated as follows, depending on which year the vehicle is purchased:

  • 2018 – $2,793 x 25% = $698.25 ITR
  • 2019 – $2,793 x 50% = $1,396.50 ITR
  • 2020 – $2,793 x 75% = $2,094.75 ITR

Example 6: Purchase of a road vehicle over $30,000

A large business purchases a road vehicle that is subject to the ITR restrictions. The cost of the vehicle is $32,000, plus GST of $1,600 and QST of $3,192.

An ITR may only be claimed for the QST payable on a maximum $30,000 purchase price ($2,992.50).

The allowable ITR, if the vehicle is purchased in one of the following three years, will be:

  • 2018 – $2,992.50 x 25% = $748.13 ITR
  • 2019 – $2,992.50 x 50% = $1,496.25 ITR
  • 2020 – $2,992.50 x 75% = $2,244.38 ITR

Example 7: Lease of a road vehicle under $800 per month

A large business leases a road vehicle that is subject to the ITR restrictions. The cost of the vehicle is $600 per month, plus GST of $30 and QST of $59.85.

The allowable ITR will be calculated based on which year the vehicle’s lease intervals begin, as follows:

  • 2018 – $59.85 x 25% = $14.96 ITR per month
  • 2019 – $59.85 x 50% = $29.93 ITR per month
  • 2020 – $59.85 x 75% = $44.89 ITR per month

To extend this example, if the vehicle is leased from October 15, 2017 to October 14, 2019, with monthly lease intervals from the 15th of one month to the 14th of the following month, the ITRs would be calculated as follows:

  • no ITRs for lease intervals from October 15, 2017 to January 14, 2018;
  • $14.96 ITRs ($59.85 x 25%) for lease intervals from January 15, 2018 to January 14, 2019; and
  • $29.93 ITRs ($59.85 x 50%) for lease intervals from January 15, 2019 to October 14, 2019.

Example 8: Lease of a road vehicle over $800 per month

A large business leases a road vehicle that is subject to the ITR restrictions. The cost of the vehicle is $1,000 per month, plus GST of $50 and QST of $99.75.

ITRs are only allowed on up to $800 per month of the lease price (QST of $79.80).

Accordingly, the allowable ITR, if any of the vehicle’s lease intervals begins in one of the following three years, will be:

  • 2018 – $79.80 x 25% = $19.95 ITR per month
  • 2019 – $79.80 x 50% = $39.90 ITR per month
  • 2020 – $79.80 x 75% = $59.85 ITR per month
  • 2021 and thereafter – $79.80 x 100% = $79.80 ITR per month

For further clarification, if the vehicle is leased from October 15, 2017 to October 14, 2019, with monthly lease intervals from the 15th of one month to the 14th of the following month, the ITRs would be calculated as follows:

  • no ITRs for lease intervals from October 15, 2017 to January 14, 2018;
  • $19.95 in ITRs ($79.80 x 25%) for lease intervals from January 15, 2018 to January 14, 2019; and
  • $39.90 in ITRs ($79.80 x 50%) for lease intervals from January 15, 2019 to October 14, 2019.

Example 9: Sale of a used road vehicle under $30,000

A large business purchases a road vehicle that is subject to the ITR restrictions in 2018 and subsequently sells that vehicle in 2020.

The cost of the vehicle in 2018 was $28,000, plus GST of $1,400 and QST of $2,793.

The allowable ITR on the purchase will be $2,793 x 25% = $698.25.

Two years later, the selling price of the vehicle (assumed at fair market value) is $10,000, plus GST of $500 and QST of $997.50.

There is an allowable ITR on the sale by the large business, calculated as follows:
ITR = [($2,793 x $10,000/$28,000) x ($2,793 – $698.25)/$2,793] x 75% = $561.09

This calculation essentially applies the percentage of the unrecoverable ITR related to the QST paid on the purchase to the remaining market value of the vehicle in comparison to the acquisition cost. This number is then multiplied by the phase-out percentage applicable during the year in which the sale takes place.

Note that this relief is not available for vehicles purchased prior to 2018, even if they are sold on or after January 1, 2018.

Example 10: Sale of a used road vehicle over $30,000 (similar to the example under paragraph 10 in the Quebec bulletin14)

A large business purchases a road vehicle that is subject to the ITR restrictions in 2018 and subsequently sells that vehicle in 2020. The cost of the vehicle in 2018 was $50,000, plus GST of $2,500 and QST of $4,987.50.

On the purchase, an ITR is only allowed for QST paid on up to $30,000 of the purchase price (i.e., $2,992.50), due to the ITR limits for passenger vehicles.

The allowable ITR on the purchase will be $2,992.50 x 25% = $748.13.

In 2020, the selling price of the vehicle (assumed at fair market value) is $20,000, plus GST of $1,000 and QST of $1,995.

The allowable ITR on the sale will be calculated as follows: ITR = [($4,987.50 x $20,000/$50,000) x ($4,987.50 – $748.13)/$4,987.50] x 75% = $1,271.81

Again, note that this relief is not available for vehicles purchased prior to 2018, even if they are sold on or after January 1, 2018.

Example 11: Road vehicle not subject to the ITR restrictions, but becomes subject to the restrictions (similar to example under paragraph 20 in the Quebec bulletin15)

A large business purchases a road vehicle that is not subject to the ITR restrictions in 2016, since it was not required to be registered to travel on public highways under the Highway Safety Code. The purchase price of the vehicle in 2016 was $25,000, plus GST of $1,250 and QST of $2,493.75.

The allowable ITR on purchase will be $2,493.75 (i.e., none of the QST is restricted).

In 2019, registration of the vehicle is required. The fair market value at this time is $20,000.

There will be a QST liability due to the change in use (and ITR eligibility), calculated as follows: QST to be self-assessed and remitted = $20,000 x 9.975% x 50% = $997.50

Example 12: Trade-in of a used road vehicle (similar to the example under paragraph 26 in the Quebec bulletin16)

A large business purchases a road vehicle that is subject to the ITR restrictions in 2016, and subsequently trades in that vehicle in 2020. ITRs were not claimed on the purchase of the vehicle in 2016, since 100% of the QST paid was restricted for the large business at that time.

The value of the vehicle upon trade-in (i.e., the amount credited to the purchaser) is $10,000, and the price of the newly acquired vehicle is $30,000. Therefore, the net price paid for the new vehicle is $20,000, on which $1,995 QST is paid (9.975% x $20,000).

The allowable ITR on the transaction is calculated as follows: ITR = $1,995 x 75% = $1,496.25

Note that the credit for QST on a trade-in would not apply to trade-in vehicles purchased on or after January 1, 2018 by a large business.

More Information

If you have any questions regarding the phase-out of the QST ITR restrictions for large businesses, please do not hesitate to call the Ryan TaxDirectTM line at 1-800-667-1600.

Lisa McIntosh
lisa.mcintosh@ryan.com