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1 – Place of Supply Rules
Place of supply rules are used to determine what rate of tax applies to a sale transaction. The place of supply rules should first be used to determine whether a transaction has taken place in Canada. If it has, the place of supply rules are used to determine whether the transaction has occurred in an HST province. We receive a large number of questions about these rules from our clients. New rules were brought into law effective May 1, 2010 and even after 8 years, some people still try to apply the old rules. The new rules are designed so that the place of supply corresponds with the place where the good or service is likely to be consumed. If your business only transacts with customers located in the same province where your business is located, then the place of supply rules should not be an issue. Otherwise it would be important to understand how these rules relate to your industry.
2 – Claiming ITCs without proper documentation
One of the benefits of being a GST/HST registrant is the ability to claim input tax credits (ITCs) in respect of GST/HST incurred in the course of the registrant’s commercial activities. However, some people seem to be unaware of, or do not understand, the documentary requirements related to claiming ITCs. Registrants are not required to submit supporting documents at the time of making ITC claims. However, the appropriate documents are required to be on hand at the time of making the claim. In the event of an audit CRA will usually review relevant documents to ensure the documents conform to the ITC documentary requirements. We often encounter situations where ITCs are denied because the registrant was unable to produce documents that meet the documentary requirements. Assessments issued because of insufficient documentary requirements can be quite costly. GST/HST registrants should make sure they understand the documentary requirements related to claiming input tax credits.
3 – Invoice in wrong company name
As mentioned in point 2 above, there are documentary requirements which need to be met in order to be eligible to claim input tax credits. A situation we commonly encounter in our practice involves clients that are part of a group of related companies. Some vendors may not distinguish between the different companies in a group when invoicing for goods sold or services rendered. For example, the vendor might address an invoice to “Company A” when the actual customer was “Company B”. If “Company B” then makes a claim for the input tax credit, and the claim is subsequently audited, CRA would disallow the credit because the invoice is not in the name of the person claiming the ITC. It is important to ensure invoices are in the correct company name when claiming an input tax credit. If the vendor has issued the invoice in the wrong name one remedy would be to ask the vendor to re-issue the invoice in the correct name.
4 – Claiming 100% of ITCs when a portion of the related revenue is exempt
Some people believe that if they are registered for GST/HST then they are entitled to claim ITCs in respect of all GST/HST incurred. However, this is not the case. ITCs are only allowed to be claimed to the extent that the underlying disbursement is used in the course of a person’s commercial activity. When a person carries on both taxable and exempt activities, ITCs must be apportioned accordingly.
5 – Claiming 100% ITCs on meals & entertainment and passenger vehicles.
The GST/HST rules mirror the income tax rules when it comes to claiming ITCs in respect of meals and entertainment expenses and passenger vehicles. For example most meal and entertainment expenses are only deductible for income tax purposes at the rate of 50% of the expense incurred. Likewise, only 50% of the GST/HST incurred would be eligible to be claimed as an ITC (assuming all other conditions for claiming ITCs are met). Similarly, the same restrictions that apply to passenger vehicles for income tax purposes also apply to the ITC. For example, the maximum capital cost for capital cost allowance purposes is $30,000 for a passenger vehicle even if the vehicle cost more than $30,000. Likewise, the maximum ITC one could claim in respect of that vehicle is equal to the GST/HST applicable to a capital cost of $30,000.
6 – Failure to self-assess on acquisition/construction of a building used for an exempt purpose.
Most GST/HST transactions involve a vendor (i.e. seller) and a recipient (i.e. purchaser). Furthermore, in respect of a sales transaction it is generally the vendor’s responsibility to collect GST/HST when it is applicable and remit the tax to CRA. However, when it comes to transactions that involve the sale and purchase of real property, if the purchaser is registered for GST/HST, the vendor does not collect the tax. Rather, it is the purchaser’s responsibility to self-assess the tax and report the transaction on a GST return. The purchaser would be entitled to offset the applicable GST/HST with eligible ITCs. As long as full ITCs are available in respect of the real property acquisition, the net tax to be remitted in respect of the purchase transaction would be nil. However, if the intention is to use the real property for an exempt purpose (i.e. long term residential rent or personal residential purposes), then this will limit or in some cases completely eliminate the ITC available to offset the self-assessed tax.
Along this same vein, we sometimes encounter situations where a builder builds a residential property with the intention of selling the constructed property. However, it may turn out that the builder is not able to sell the property and decides instead to enter into a long term rental arrangement with a residential tenant. Since the sale of new housing is taxable but long term residential rent is exempt, the act of turning new residential housing into a long term residential rental property triggers a deemed sale for GST/HST purposes. The builder is deemed to have sold and purchased the property for its fair market value and to have collected the applicable GST/HST. The builder is obligated to remit the GST/HST applicable to the deemed sale. Note that the builder may be entitled to a new residential rental property rebate in respect of the rental property. Also note that the deemed sale is triggered even if the builder never intended to sell the property but instead intended to use it to generate long term residential rent.
7 – Intercompany transactions – Section 156 Election Form RC4616
The section 156 election is an election available to qualified closely related Canadian corporations and partnerships which allows them to treat supplies made between them to be for nil consideration. This alleviates the requirement to collect and remit GST/HST on intercompany transactions. Prior to January 1, 2015, qualified parties could enter into the election by simply completing the election form GST25. This form was not sent to CRA. It was simply required to be kept on file in the event of a CRA audit.
However, the rules changed effective January 1, 2015. Any new elections entered into on or after that date had to be documented on the election form RC4616. That form has to be completed within a certain timeframe and physically sent to CRA (can also be filed on-line). Furthermore, all existing elections entered into prior to January 1, 2015 also had to be documented on the election form RC4616 and filed with CRA before the end of 2015. Any elections filed prior to January 1, 2015 are deemed to never have been filed.
We still encounter people who are unaware of the new requirements related to the section 156 election. It is important to ensure all required steps have been taken if companies wish to rely on the relief provided by the section 156 election.
8 – Failure to collect GST/HST on disposition of assets
Most businesses are good at applying the correct GST/HST rule when it comes to the mainstream transactions of their businesses. However, when it comes to one off types of transactions like trading in a used vehicle, or selling an asset that was used in the course of carrying on the business’ commercial activity, the GST/HST rules are often forgotten. It’s important to consider the GST/HST rules in respect of all transactions not just the mainstream ones. Otherwise, there may be unwanted consequences in the event of a CRA audit.
9 – Assuming IPP not taxable
Another type of transaction where the applicability of GST/HST does not seem to be intuitive involves the sale of intangible personal property. Intangible personal property is property that cannot be seen or touched; for example, patents, memberships and franchise rights. It’s important to remember that the supply of intangible personal property in Canada is generally subject to GST/HST.
10 – Charities erroneously assuming transactions are taxable
We often encounter many charitable and not-for-profit organizations and advisors who seem to be unaware of the special GST/HST rules that apply only to charities. These rules serve to exempt many supplies by charities that would be taxable if supplied by any non-charity entity. Most commonly we encounter charitable organizations that assume services rendered by the organization are taxable seemingly because when they acquire those same services from other non-charitable organizations they are taxable; i.e. bookkeeping or advertising services.
A charity can unknowingly accumulate a GST/HST liability by collecting GST/HST on the sale of goods and services that are GST/HST exempt. This is because most charities are required to use the “net tax calculation for charities”. This calculation entails remitting to CRA only 60% of the GST/HST collected. However, when tax is collected on exempt goods and services that tax is remittable at the rate of 100%. One can easily imagine how if a charity does not know the goods or services it provides are exempt from GST/HST the charity also doesn’t know that the tax collected is remittable at the rate of 100% and not 60%! It is important that charitable organizations ensure they understand all relevant GST/HST rules applicable to their organization
