Adlexco – Court of Quebec finds that the presence of any large business in a JV taints all inputs acquired by the operator for ITR recapture purposes

When Ontario (and other provinces) agreed to join the HST system, one of the added features of the provincial component of the HST system was that input tax credits (ITCs) to which "large businesses" otherwise would be entitled for various categories of purchases (such as fuel, electricity, telecommunications services, food and entertainment) were "recaptured" (i.e., effectively denied), subject to a phase-out of this rule. In 28 March 2013 Interpretation 141341, CRA indicated that one of the effects of s. 27(6) of the New Harmonized Value-added Tax System Regulations, No. 2 was that, in the situation where the operator under a joint venture was not a large business and one of the three joint venture participants was a large business, the purchase of electricity by the operator would result in the recapture of the provincial component of HST based on the proportionate (33 1/3%) interest of the large business participant.

Lachapelle JCQ confirmed that the somewhat similar Quebec rule for the recapture of input tax refunds (ITRs) worked in a more draconian manner regarding such a joint venture: if any of the joint venturers on behalf of whom the operator of the JV acquired subject inputs was a large business, this had a “tainting” effect, i.e., 100% of such inputs were subject to the recapture rule.

Neal Armstrong. Summary of Gestions Adlexco Ltée v. Agence du revenu du Québec, 2023 QCCQ 5625 under s. 27(6) of the New Harmonized Value-added Tax System Regulations, No. 2.