Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
TO:
XXXXX
FROM:
Patel,Bhavesh
CASE NUMBER:
104695
DATE:
May 23, 2008
SUBJECT:
_GST/HST Interpretation
Employee reimbursements
Dear XXXXX:
I refer to your XXXXX concerning your questions on the methods of calculating reimbursements of expenses made by employer to its employees under the Excise Tax Act.
You mentioned that you used to be a XXXXX and are thinking of starting your bookkeeping business. You wish to provide your services to professional firms such as engineers, accountants or lawyers and have some questions on the aforesaid subject matter that you need some clarifications on. You have searched our website but were not 100% sure.
You have requested that the Canada Revenue Agency (CRA) provide answers to questions on some hypothetical situations that you have provided relating to reimbursements made by an employer to its employees with specific regard to interpretation of GST/HST Memorandum 400-3-11 Allowances and Reimbursements.
Each of your questions is reproduced below and our responses provided. For the purpose of our responses, the terms GST or the prescribed factor of 4/104th also refer to HST and 12/112th respectively.
These comments represent our general views. They are neither rulings nor interpretations and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Goods and Services Tax Rulings, do not bind the Canada Revenue Agency with respect to a particular situation.
XXXXX
XXXXX
Questions and responses:
Question 1:
Methods of Calculating Reimbursements: Per 400-3-11 (26) the calculation method chosen must be used consistently within each category of reimbursed amounts (e.g. airfare, hotel accommodation, food, beverages and entertainment etc) throughout the fiscal year.
I am interpreting this as: I choose to use the exact calculation method to reimburse staff business promotion expenses, I must use this exact calculation method throughout the same fiscal year for all staff business promotion expenses and claim only 50% of ITC. Is this correct?
Response 1:
GST Memorandum 400-3-11 Allowances and Reimbursements explains the ITC eligibility for allowances and reimbursements under the provisions of the ETA.
GST Memorandum 400-3-3 Food, Beverages and Entertainment outline the restrictions on input tax credit (ITC) eligibility with respect to food, beverages and entertainment (FBE) expenses under the ETA.
If you choose to use the exact calculation method to reimburse an employee for a particular category of expenses, you must use the exact calculation method throughout the fiscal year for such expenses reimbursed to all employees. In addition, when using the exact calculation method for reimbursements, you are required to meet the general documentary requirements prescribed under subsection 169(4) of the ETA. For more information on documentary requirements, refer to GST Memorandum 400-1-2 Documentary Requirements available on the CRA website at: http://www.cra-arc.gc.ca/E/pub/gm/g400-1-2/g400-1-2-e.html
The 50% ITC limitation to which you refer applies to FBE and not to airfare or hotel accommodation.
Question 2:
What happens if one employee did not provide sufficient documentary evidence, for example, the receipt provided was just a credit card slip that shows the total amount paid including tips. Do I ignore the ITC? Or can I use the factoring method to calculate the ITC and claim only the 50%? For the same reporting period, we have an education seminar reimbursement. No receipt was provided. I can use the factoring method to calculate ITC.
Response 2:
The use of factor method is dependent on the documentary evidence and the 50% ITC claim limitation pertains to FBE expenses.
Assuming that the employee used his/her own credit card, the general documentary requirements apply for claiming ITC's as explained in our response above - GST Memorandum 400-1-2 Documentary Requirements.
Assuming that the expenses were paid for by using employer's credit card, I draw your attention to GST Policy P-184 Credit Card Expenses & The Registrant's Use of The Factors For Claiming ITC's found on CRA website: http://www.cra-arc.gc.ca/E/pub/gl/p-184/p-184-e.html
The CRA will permit a registrant who is an employer, partnership or charity, to use the factor method for claiming input tax credits on company credit card expenses charged to the company credit card subject to certain conditions including documentary requirement. The documentary evidence used in the calculation of the input tax credit must satisfy the following criteria:
(a) Where a credit card receipt is issued in conjunction with another component of supporting documentation, both components must be obtained by the registrant before the return in which the input tax credit is claimed is filed; and,
(b) Where no other supporting documentation is issued in conjunction with a credit card receipt (e.g., gasoline service stations and hospitality industry), the credit card receipt will constitute sufficient supporting documentation to claim an input tax credit.
Note that the monthly credit card statement does not constitute sufficient documentary evidence to claim an input tax credit.
Question 3:
I reimburse a staff for a golf tournament expense $200. It includes green fees and dinner. It does not show a gst breakdown. Can I breakdown the ITC and claim 50% using the factoring method?
ITC $3.85 (50%)
Golf Dues = $192.3 + $3.85 (50%) = $196.15
The $196.15 golf dues will be treated as 100% non-deductible. Is this correct?
OR
Do I have to ignore GST as I chose to use the exact method calculation in the first place. That means $200 is allocated to golf dues (100% non-deductible).
Response 3:
A golf tournament expense (and NOT golf membership dues) that includes dinner would presumably fall in the category of FBE and I draw your attention to memo 400-3-3, particularly paragraph #'s 23, 24 & 25.
Where a reimbursement is in respect of a supply of FBE and the 50% limitation applies, registrants may choose one of two ways (exact calculation or the factor method) to recapture the ineligible 50%, depending on the available documentary evidence. However, the method chosen must be used consistently throughout the fiscal year.
Question 4:
Can I assume GST is included in all business/education meetings example - rotary lunch meetings, chamber luncheons, network breakfast meetings? Normally the employee only submits the notice of the meeting that show the total amount but rarely with a GST breakdown. Does 50% limitation rule apply to this category - simply because there is meal and beverage attached to it?
Response 4:
Unfortunately, I am not able to respond in any specific manner as it is a very generic question based on your assumption. But I wish to draw your attention to GST Memorandum 400-3-3, Food, Beverages and Entertainment, which outlines situations where outlays in respect of FBE will not be subject to the 50% restriction.
Section 236 of the ETA (which parallels section 67.1 of the Income Tax Act) is intended to limit the ITC that may be claimed by a registrant for GST in respect of supplies of FBE. Where the deduction for income tax purposes is limited to 50% of the cost of FBE, only 50% of the GST in respect of these expenses qualifies for an ITC.
The Income Tax Act outlines various exceptions to the 50% limitation. In particular, subsection 67.1(1) does not apply to an amount paid or payable by a person in respect of the consumption of food, beverages or enjoyment of entertainment in the following cases:
(a) where the FBE are provided by a person carrying on a business of providing FBE (e.g., restaurants, hotels and airlines) that normally provide them for compensation;
(b) where the FBE relate to a fund-raising event, the primary purpose of which is to benefit a registered charity;
(c) where the taxpayer is compensated by someone else (e.g., where a client is billed and the amount expended is identified in the account submitted to the client as an expense for FBE);
(d) where an amount is required to be included in computing the income of an employee of the person as a taxable benefit;
(e) where the amounts paid for FBE are in respect of an employee at a remote work location;
(f) where the person incurs expenses for FBE made generally available to all employees at a particular event (e.g., a Christmas party).
Also, further information may be obtained in the Income Tax Interpretation Bulletin, IT-518R, Food, Beverages and Entertainment Expenses.
Question 5:
Mileage reimbursement to employee, can the employer claim the ITC? Example: $.50 per km x 50 km. If so which method?
Gifts to clients - gourmet gift baskets, or gift certificates (restaurant, Chapters) - does 50% limitation rule apply to this category of gifts? Or can the employer claim the full 100%.
Response 5:
Based on the wordings of your question ($0.50 per km x 50 kms), it appears to be referring to motor vehicle allowance. Assuming that it does, paragraph # 13 of 400-3-11 explains that the registrant is deemed to have paid tax equal to 4/104ths of the amount of the "reasonable" allowance and that factor method could be used for calculating ITC's on such allowance, provided no amount is included in computing the receiver's income for income tax purposes.
In case of reimbursement of gift expense that does not qualify as food, beverage or entertainment (see below), an employer can claim ITC's (Section 175 ETA) subject to the general rules for claiming an ITC for the GST reimbursed to the employee or partner for expenses incurred in Canada. These rules are explained in GST Memorandum 400, Input Tax Credits. Again, the 50% ITC limitation to which you refer applies to FBE expenses only.
# 14 of GST memo 400-3-3 Food, Beverages and Entertainment explains: "Entertainment" is defined under paragraph 67.1(4)(b) of the Income Tax Act. CRA Interpretation Bulletin IT-518 states that the following items are considered to be entertainment expenses and to be subject to the 50% limitation:
(a) the cost of tickets for a theatre, concert, athletic event or other performance;
(b) the cost of private boxes at sports facilities;
(c) the cost of room rentals to provide entertainment, such as a hospitality suite;
(d) the cost of a cruise;
(e) the cost of admission to a fashion show;
(f) the cost of entertaining guests at night clubs, athletic, social and sporting clubs and on hunting, fishing, vacation and similar trips.
The registrant is allowed to choose one of two methods to calculate their ITC eligibility for amounts they reimburse to employees or partners during a particular reporting period (GST Memo 400-3-11):
(a) where sufficient documentary evidence is available, they may calculate the actual tax paid on reimbursed expenses (the "exact calculation method"); or
(b) where sufficient documentary evidence is not available, they may claim an ITC based on a factor of 4/104ths of the total amount reimbursed (the "factor method").
The factor used recognizes that the total expense may include gratuities, provincial sales tax and other amounts not subject to the GST.
UNCLASSIFIED
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