Principal Issues: [TaxInterpretations translation]
Tax consequences related to the payment of GST and Quebec Sales Tax (QST), the claiming and refunding of an input tax credit and an input tax refund (Quebec) where there is a reassessment to deny personal expenses or where section 67.1 of the Act applies.
Position:
General comments on the operation of paragraph 12(1)(x), the election under subsection 12(2.2) and paragraph 20(1)(hh).
Reasons:
Application of the Act.
December 5, 2002
Québec Tax Services Office Headquarters Sylvie Labarre, CA Attention: Mr. Martial Labbé, CGA (613) 957-8953
2002-015518
Input tax credit
This is further to your email of July 31, 2002, in which you requested our opinion on the document prepared by XXXXXXXXXX.
The first part of this document deals with the impact of disallowing expenses for which an input tax credit will have to be repaid. The second part of the document deals with the tax treatment of an input tax credit received in respect of a meal expense to which section 67.1 of the Income Tax Act (the "Act") applies.
Our Comments
The following comments are regarding the Act. We do not comment on the Excise Tax Act or provincial legislation.
This document discusses, among other things, the tax consequences of paying the goods and services tax (GST) and Quebec sales tax (QST), receiving an input tax credit (refund of GST paid on an expense) and receiving an input tax refund (refund of QST paid on an expense).
In the example given in the document, the taxpayer incurred a current expense that he considered to be deductible from income, of $100,000, GST of $7,000 and QST of $8,000. GST and QST paid on a deductible current expense are also deductible current expenses, whether or not the taxpayer subsequently claims an input tax credit (ITC) or input tax refund (ITR), and regardless of the taxpayer's accounting entries. Consequently, the amount considered by the taxpayer to be a deductible expense was $115,000.
If a taxpayer claims both ITCs and ITRs, the ITC and ITR amounts are both considered to be amounts of assistance received from a government, either pursuant to subsection 248(16) in the case of the ITC, or by virtue of our interpretation of paragraph 12(1)(x) in the case of the ITR. ITCs and ITRs must be included in the taxpayer's income pursuant to paragraph 12(1)(x) unless one of subparagraphs 12(1)(x)(v) to (viii) applies. In such a situation, the taxpayer may elect under subsection 12(2.2) in respect of ITCs and ITRs to reduce the expenditure, which will consequently be considered to have always been reduced. Subparagraph 12(1)(x)(vii) then applies and there is no income inclusion.
If the taxpayer is subsequently required to repay the ITC or ITR, consider whether paragraph 20(1)(hh) applies. Subparagraph 20(1)(hh)(i) allows a deduction for an amount repaid pursuant to a legal obligation to repay all or part of a particular amount that is included under paragraph 12(1)(x) in computing the taxpayer's income. If the taxpayer has made an election pursuant to subsection 12(2.2) in respect of all ITC or ITR amounts received, that subparagraph does not apply since those amounts have not been included in income pursuant to paragraph 12(1)(x). On the other hand, subparagraph 20(1)(hh)(ii) allows a deduction for an amount repaid pursuant to a legal obligation to repay all or part of a particular amount that is, by reason of subparagraph subsection 12(2.2), not included under paragraph 12(1)(x) in computing the taxpayer’s income for the year or a preceding taxation year, where the particular amount relates to an outlay or expense that would, if the particular amount had not been received, have been deductible in computing the taxpayer’s income for the year or a preceding taxation year.
In the example described in the document, if the subsection 12(2.2) election was made in respect of the entirety of the ITCs and ITRa, the amount of the expenditure would be deemed to have always been equal to the excess of $115,000 over $15,000, or $100,000. If, during an audit, the CCRA determines that the expense is not deductible, the amount to be disallowed is $100,000 in such a situation. This is because the election made pursuant to subsection 12(2.2) regarding ITCs and ITRs received in respect of this non-deductible expense is still valid and does not have to be disallowed by the CCRA. Following the audit, the taxpayer will likely have to repay the ITCs and ITRs received in respect of the non-deductible expense. In that situation, where the taxpayer has made the election pursuant to subsection 12(2.2), the taxpayer will not be entitled to any deduction in respect of the amounts repaid, since paragraph 20(1)(hh) will not apply. Subparagraph 20(1)(hh)(i) will not apply because the amounts reimbursed were not included in the taxpayer's income pursuant to paragraph 12(1)(x), while subparagraph 20(1)(hh)(ii) will not apply because the amounts reimbursed relate to a non-deductible expense.
On the other hand, if we assume that the election pursuant to subsection 12(2.2) was not made in the example described in the document, the taxpayer would have deducted a total expense of $115,000 and would have included in income an amount of $15,000 pursuant to paragraph 12(1)(x). Consequently, the non-deductible expense that should be disallowed at audit would be $115,000. We would not be able to change the amount that has been included in the taxpayer's income under paragraph 12(1)(x). However, if the taxpayer repays the ITC and ITR received, he will be entitled to a deduction of $15,000 pursuant to subparagraph 20(1)(hh)(i).
As for the second part of the document, which concerns section 67.1, the CCRA's position is that section 67.1 takes precedence over the application of subsection 12(2.2). Once the section 67.1 reduction has been made, there is nothing to prevent a taxpayer from making an election pursuant to subsection 12(2.2) and reducing the expense already reduced by section 67.1 by the amount of ITCs and/or ITRs received.
Thus, in the example given in the document, the amount actually paid or payable is $107 (only the GST is shown in the example). Due to the application of section 67.1, the deemed amount paid or payable that becomes the expense will be $53.50 (i.e. 50% of $107). In this example, the taxpayer receives an ITC of $3.50. If the taxpayer elects pursuant to subsection 12(2.2), the expense will be reduced to $50.00 (i.e., $53.50 - $3.50) and no amount will be included in the taxpayer's income pursuant to paragraph 12(1)(x). On the other hand, if the election pursuant to subsection 12(2.2) is not made, the amount of the deductible expense will be $53.50, and the amount included in income pursuant to paragraph 12(1)(x) will be $3.50.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope you find these comments helpful. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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