All registrants know, (and if they don't they may be entitled to an interesting refund) that when a mileage allocation is paid to an employee for meals purposes or for the use of a vehicle in the course of his employment, an input-tax credit ("ITC") is automatically created for the benefit of the employer.
For example, if an employer pays an employee a mileage allocation of 40 cents per kilometer totaling $100.00 for mileage performed since July1, under the HST, this $100. Is "deemed" to be an HST-included amount calculated as 13/113 X 100= $11,50; the employer may claim this $11.50 as an ordinary ITC. The ITC must be supported by a mileage log detailing dates, amounts and purpose of mileage reports. Normally, the mileage report claim presented by the employee to the employer is sufficient.
HST implications for Outaouais region registrants.
Before the introduction of the HST, claiming these ITCs was simple for Ottawa region employers: mileage paid to employees was multiplied by 5/105 and that was the eligible ITC. The situation has changed. Indeed, it is important to note that the rate of the "deemed" tax included in the allocation is determined by the rate of tax of the province where the mileage is done. For GST/HST purposes, Ontario is a "participating province" with a rate of 13%, while Quebec is not and is only subject to the 5% GST. Accordingly, employees using their vehicles both in Ottawa (and Ontario at large) and in Gatineau (and Quebec at large) must now segregate the mileage done in Ontario and Quebec; the employer is only entitled to a 13/113 or 5/105 ITC depending on the province where the mileage is done.
An employer who claims the 13/113 for mileage done in Quebec could be reassessed for the extra ITC claimed in error, with penalties and/or interests.
Are mileage allocations subject to recapture rules?
The recapture rules of the Ontario portion of the HST are based on similar "input-tax refunds" ("ITR") restrictions imposed by Quebec on certain purchases by "large businesses" (annual sales over $10 million). Since mileage allocation are used in part to pay for gasoline purchases, which are duly subject to recapture rules, a question arises relatively to the eligibility of ITCs on mileage allocations paid by large enterprises. Quebec, for example, considers mileage allocations subject to their ITR restrictions ( but does allow administratively use of a 4.1% factor in certain circumstances).
The good news is that CRA has confirmed that mileage allocations are not "prescribed property" and therefore not subject to recapture rules. Another example of the fact that although the recapture rules are similar to the QST Quebec restrictions, they are not identical. Accordingly, all registrants are entitled to the full 13/113 ITC regardless of their annual sales, as long as mileage is done in a participating province.
It should be noted that persons registered for QST, (with the exception of large businesses) are also entitled to an ITR of 7.5/107.5 in relation to Quebec mileage.
Expense reimbursements.
Where employees expenses are actually reimbursed, similar rules apply. The employer, not the employee, is "deemed" to have acquired the supply and the employer is entitled to an ITC of the actual tax paid; naturally the ITC is limited to the amount of tax paid which depends on the province where the purchase is made. Accordingly, again, the HST introduction creates supplementary administrative burden, especially for Ottawa region registrants who routinely buy goods and services (themselves or through their employees) in both Quebec and Ontario.
With respect to such expenses reimbursements, care must be taken with respect to "meals and entertainment" expenses which are subject to the general 50% limitation for both income tax expense and ITC purposes; "meals and entertainment" expenses are also subject to the recapture rules as far as large enterprises are concerned. Where the amounts claimed include other provincial taxes or non-taxable minor items (such as the tip in a meal invoice reimbursement) CRA allows the use of the following " tax factors" : 4/104 (GST provinces) or 12/112 ( most HST provinces), 11/111 (British Columbia) and 14/114 ( Nova Scotia) instead of having to figure out the actual amount of tax. Do note that claiming actual tax paid, generally (with the exception of airline tickets) yield a larger ITC.
Employee allocations and employee expenses reimbursement have many specific particularities, especially since the introduction of the HST. All registrants must be thoroughly familiar with these rules and particularities to ensure that ITCs are maximized, or more importantly, that a "contingent liability" situation does not exist and grow. It could be a monster in four year times. In doubt, do consult a commodity tax specialist.
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