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Phase-Out of Recaptured ITCs — Important Update June 22, 2017 No. 2017-35

Large businesses must prepare their system for the last phase of the phase-out period for recaptured input tax credits (RITCs) under the Ontario HST. On July 1, 2017, the recapture rate used in these calculations will be reduced to 25% (from 50%). Affected business may need to adjust various accounts and calculations related to the specified property and services subject to the RITC rules, including common area maintenance charges and employee expense accounts.

As Ontario prepares to finally eliminate the RITCs on July 1, 2018, Quebec and Prince Edward Island will shortly begin to phase-out similar rules. Quebec will begin a three-year phase-out period of the restrictions related to input tax refunds (ITRs) on January 1, 2018, while Prince Edward Island will begin a three-year phase-out of the province’s HST RITC rules starting April 1, 2018. Affected businesses should also consider preparing their systems for these upcoming tax changes.

Background — Ontario RITC rules Ontario introduced RITC rules for large businesses effective July 1, 2010. The RITC rules essentially restrict the input tax credits (ITCs) related to the provincial component of the Ontario HST for a specified property or services acquired, imported or brought into Ontario for large businesses.

Large businesses subject to the RITC rules cannot simply forgo claiming their ITCs and not report the RITC as required in their GST/HST returns. These businesses generally claim the related ITCs in the appropriate GST/HST reporting period and report the RITCs as required.

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In general, a large business is defined as a business with more than $10 million in annual revenues, including revenues from related entities, as well as most financial institutions. Special rules apply for reorganization transactions and new businesses.

A specified property or services includes qualifying energy, telecommunications, meals and entertainment expenses and motor vehicles under 3,000 kilograms.

The three-year phase-out period for the RITCs began July 1, 2015.

Ontario’s final RITC phase-out period

Ontario is phasing out the recapture rates used in the calculations under the provincial RITC rules over a three-year period as follows:

Recapture periods Ontario RITC

Recapture Rate July 1, 2015 to June 30, 2016 75% July 1, 2016 to June 30, 2017 50% July 1, 2017 to June 30, 2018 25% July 1, 2018 and beyond 0%

Avoid compliance errors

Large businesses must apply the recapture rate that applied at the time the HST first became payable or was paid without having become payable for that particular specified property or service. As such, these businesses have to review their data entries to make sure that the appropriate recapture rate (100%, 75%, 50% or 25%) applies for a particular invoice, and also must ensure that the RITCs are reported in the proper reporting period.

As a reminder, large businesses are required to enter the gross RITC amounts when they complete their schedule B electronically. Some large businesses that adjusted their systems to include the new 25% recapture rate as of July 1, 2017 will have to manually recalculate the gross RITCs for the particular reporting period when they file their GST/HST return. Otherwise, these large businesses may erroneously report the net 25% RITC amount on their Schedule B, on which the 25% recapture rate will apply again—potentially creating a tax liability. These businesses may also have to allocate the gross RITCs between the applicable recapture rates, such as where their reporting periods straddle July 1, 2017.

Large businesses may also have to adjust other systems and calculations, such as employee expense accounts and their estimation/reconciliation RITC method, if applicable.

Large businesses that do not report the RITC correctly for a prior reporting period must correct the particular reporting period related to that particular RITC. Businesses cannot

TaxNewsFlash – Canada June 22, 2017 Phase-Out of Recaptured ITCs — Important Update No. 2017-35

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simply adjust the current reporting period to remit any additional tax owing. Related penalties for misreporting RITCs may apply.

Upcoming phase-outs of other RITC rules and QST restrictions

Quebec ITR claim rate

Quebec will begin a three-year phase-out period of the restrictions related to ITRs on January 1, 2018. Currently, unlike the RITC rules, large businesses that incur Quebec Sales Tax (QST) on a specified property or service cannot claim any related ITRs.

In general, large businesses will be eligible to claim ITRs at a rate of 25% of the QST that becomes payable as of January 1, 2018 in respect of specific property and services.

The claim rates will be phased in as follows:

QST ITR Restriction Phase-out Period

Quebec ITR Claim Rate

January 1, 2018 to December 31, 2018 25% January 1, 2019 to December 31, 2019 50% January 1, 2020 to December 31, 2020 75% January 1, 2021 and beyond 100%

The specified goods and services subject to the ITR restrictions are similar to the specified goods and services subject to the Ontario RITC rules.

P.E.I. RITC recapture rate

Prince Edward Island will also begin a three-year phase-out period of the province’s HST RITC rules as of April 1, 2018. The specific goods and services subject to the Prince Edward Island HST RITC rules are similar to the specified goods and services subject to the Ontario RITC rules.

The recapture rate will be phased out as follows:

Prince Edward Island HST Recapture Periods

P.E.I. RITC Recapture Rate

April 1, 2018 to March 31, 2019 75% April 1, 2019 to March 31, 2020 50% April 1, 2020 to March 31, 2021 25% April 1, 2021 and beyond 0%

We can help

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Your KPMG adviser can help you review how your systems, costs and GST/HST and QST returns will be affected by the reductions of the recapture rates during the phase-out period in Ontario and Prince Edward Island, as well as the upcoming phase-out period of the ITR restrictions in Quebec. We can assist you with these tax compliance obligations as well as other indirect tax obligations.

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