A taxpayer incurred what it viewed as a currently deductible expense of $100,000 and paid GST and QST thereon of $7,000 and $8,000, for which it claimed input tax credits (ITCs) and input tax refunds (ITRs), respectively. What is the ITA treatment of such ITC and ITR amounts if CCRA subsequently denied the expense deduction, as well as denying the ITC and ITR claims?
The Directorate noted that the ITC and ITR amounts would be considered government assistance pursuant to s. 248(16) (regarding the ITCs) and s. 12(1)(x) (regarding both), so that the taxpayer could elect pursuant to s. 12(2.2) to reduce such expenditures, and so that, pursuant to s. 12(1)(x)(vii), there would be no income inclusion.
On the repayment of the ITC and ITR amounts, s. 20(1)(hh)(ii) would allow their deduction if by reason of s. 12(2.2) they had not been included in income.
If the s. 12(2.2) election had been made, since the amount of the claimed expenses would be deemed to have been $100,000, only that amount would be denied by CRA and, as noted, the repayment of the ITC and ITR amounts would result in a further $15,000 deduction pursuant to s. 20(1)(hh)(ii). If no such election were made, so that there was an income inclusion pursuant to s. 12(1)(x), repayment of the ITC and ITR amounts would generate a deduction pursuant to s. 20(1)(hh)(i).