A few months ago, I wrote a column wherein I stated Canada's Revenue Agency had confirmed that mileage allocations are not considered as "prescribed property" for HST purposes and therefore not subject to the "recapture" rules for the Ontario portion of the HST. A number of readers contacted me, apparently having received conflicting information. All asked me to please provide such confirmation, i.e. something written by CRA.
A few additional comments are warranted. When I wrote that column, at least THREE different agents had verbally confirmed to me that mileage allocations are not included in the list of "prescribed property" subject to recapture rules; in addition Tecnical Information Bulletin B-104, which outlines CRA's policy about recapture rules is totally mum about mileage allocations. Other tax specialists had received the same information as me. I did not hesitate to conclude, somewhat prematurely, that mileage allocations were not subject to recapture rules, well, maybe.
Mind you, technically speaking, I am still correct since the regulations defining and precising which property will be considered as "prescribed property" have not yet been tabled or published althoug the law is in effect since almost six months... Furthermore no amendments to B-104 dealing with mileage allocations have been issued. It is therefore somewhat logical to consider that recapture rules do not apply.
Nevertheless, it now appears that CRA has changed its tune on the subject. The first answer you get on the HST hotline is that mileage allocations will be subject to recapture rules. Some say the WHOLE allocation will be subject to recapture with respect to the provincial portion while some also say THAT ONLY A PORTION of the allocation could be subject to recapture. Now this, is a problematic issue.
Mileage allocations is the process by which employers refund employees for the costs they incur by using their vehicle in the course of their employment. When calculated on a "per kilometer" basis, under certain circumstances, this allocation is not considered a taxable benefit for the employee and remains a deductible business expense for the employer. The costs incurred by the employee include, rental or amortization of purchase costs, insurance, licenses, fuel and repair and maintenance expenses.
Taken individually, some of these categories of expense, such as purchase and rental costs of vehicle and, in Ontario, fuel (gasoline but not diesel) would be subject to recapture rules. Other costs, such as repairs and maintenace are clearly not subject to recapture rules. Finally, other categories of expenses are not taxable as such. (permits and insurance); in BC, only the GST applies (not the 7% provincial portion) to fuel costs. No wonder, taxpayers need supplementary guidance on the treatment of these allocations for HST purposes.
Section 174 of the Excise Tax Act (which imposes the GST/HST) deals with such allocations. Providing the allocation is paid to cover the costs of, "almost exclusively" ( i.e. 90%) taxable purchases, the employer, not the employee is "deemed" to have made the purchases and paid the tax thereon; accordingly, this is why employers may claim ITCs with respect to such allocations. For GST purposes, CRA has always considered that mileage allocations are paid in relation to taxable purchases and allows an ITC of 5/105 of the allocation payment.
Presumably, its because of the deeming provision relating to categories of expenses that are included in the list of prescribed property that the mileage allocation itself, or a portion thereof, could be subject to recapture rules. If you dig deeper at CRA someone will tell you that they recognize that the allocation is also paid in part for categories of expenses not considered as "prescribed property" and that various solutions are being considered. It may be for instance that the taxpayer will be entitled to himself determine a "just and reasonable" portion of the allocation that is for "prescribed property"; he should then compute the recapture amount only on that "just and reasonable" portion. Others at CRA say that the regulations may determine a fixed portion on which the recapture rules apply. As far as Ontario is concerned, at the end of the day, it is likely that only a portion of the allocation will be subject to recapture.
In the absence of regulations ( or even clearcut policy) it is interesting to look at how these allocations are treated in Quebec, the inspiration for the recapture rules. The Quebec law is crystal clear: if a portion of the allocation is for a category of product for which ITR restriction applies, the WHOLE allocation is also subject to restriction. However when these restrictions were introduced it created such an uproar with respect to mileage allocations that Revenue Quebec administratively (i.e no legal basis) allowed taxpayers to use a factor of 4.1% to compute the ITR on employee's expenses reports rather than segregating restricted and non-restricted expenses; under these conditions, the 4.1% factor applies also to mileage allocations.
The BC matter is special in itself because motive fuels are covered by "point-of-sale" exemption specific to BC. (in effect only the 5% GST applies to motive fuels purchases in BC). Does that mean that the whole allocation does not meet the "90% taxable purchase" criteria and that therefore section 174 does not apply to the BC portion of the tax? Who knows?
Until CRA makes up its mind and publishes their policy on the subject, our advice is to take the conservative route and consider the whole mileage allocation as indeed, being subject to the recapture rules. If supplementary ITCs are made available in the future, there is a four year time limit to claim them. Hopefully, CRA will have clarified the matter, before time expires.
In the end, there is one important lesson here: where CRA is concerned, NEVER trust verbal information not clearly supported in writing.
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