13 July 2009 Internal T.I. 2009-0309291I7 - Deductibility of GST

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues:

1. Is GST paid by the purchaser of goods and services deductible for income tax purposes?

2. Is GST collected from a purchaser by a vendor and remitted to the Receiver General deductible for income tax purposes by the vendor?

3. Is GST payable by a vendor as a result of the vendor's failure to collect and remit GST to the Receiver General deductible for income tax purposes?

4. Is GST payable by an employer on the provision of employee taxable benefits deductible to the employer for income tax purposes?

Position:

1. Yes, provided the GST paid is in respect of an expense that is also deductible for income tax purposes.

2. No.

3. Yes, net of any GST rebate receivable in respect thereof.

4. Generally, yes.

Reasons:

1. The payment of GST by a purchaser of goods or services is deductible in computing income if it has been made for the purpose of gaining or producing income from a business or property, pursuant to the general rules of section 9 of the Act.

2. GST paid by a vendor as an agent that has collected the GST payable from a purchaser on a taxable supply and remitted it to Her Majesty as a discharge of the purchaser's liability is not deductible by the vendor (it is paid by the purchaser and is simply held in trust by the vendor to be remitted to the Crown).

3. In the case of "Tax-Extra" assessments, the vendor may claim a bad debt deduction under paragraph 20(1)(p) of the Act equal to the uncollected GST net of any GST rebate receivable in respect thereof. In the case of "Tax-Included" assessments, the GST would not be deductible for the same reasons as Question 2 (above).

4. Generally, GST paid or payable by an employer in connection with employee benefits provided by the employer would be deductible pursuant to the general rules of section 9 of the Act, unless the taxpayer makes an election under subsection 12(2.2) of the Act to exclude the amount of any ITC received from income which would otherwise be taxable pursuant to paragraph 12(1)(x) of the Act.

July 13, 2009

Deductibility of GST for Income Tax Purposes

We are writing in response to your email correspondence dated February 6, 2009 wherein you requested our comments regarding the deductibility of Goods and Services Tax ("GST") for income tax purposes in particular circumstances.

1) GST Payable by a Purchaser

Whether a particular expense is deductible in computing the income for the year of a taxpayer is a question of fact that can only be determined by reviewing all of the circumstances applicable to a particular situation. Where GST relates to the acquisition of capital property, the amount of GST paid by a purchaser would be added to the cost of that property. Similarly, where the payment of GST relates to an item that is part of the inventory of a purchaser, the amount of the GST payable by the purchaser would be added to the cost of the inventory. Other payments of GST may be deductible in computing income if they have been made for the purpose of gaining or producing income from business or property.

Where a taxpayer makes a claim for an input tax credit ("ITC") or a rebate under the Excise Tax Act (the "ETA") with respect to GST paid in respect of a property or service, the amount claimed is deemed to be assistance from the government pursuant to subsection 248(16) of the Income Tax Act (the "Act"). The Canada Revenue Agency's general position on the taxable status of government assistance is outlined in Interpretation Bulletin IT-273R2 - Government Assistance - General Comments ("IT-273R2").

In general terms, where a taxpayer claims an ITC or a rebate under the ETA in respect of the GST paid on a property or service, the taxpayer must include the amount in income pursuant to paragraph 12(1)(x) of the Act. Alternatively, the taxpayer may elect, under subsection 12(2.2) of the Act, to reduce the cost of the particular property or the amount of the expense to which the GST paid relates, by the amount of the assistance received. The effect of an election under this provision is to reduce the amount required to be included in income under paragraph 12(1)(x) of the Act for the year in which the assistance is received, and to reduce the amount of the related expense or outlay. This is discussed in more detail in paragraphs 14 and 15 of IT-273R2.

2) GST Collected by a Vendor

A vendor's obligation to collect GST is imposed under subsection 221(1) of the ETA which states that every person who makes a taxable supply shall, as an agent of Her Majesty in right of Canada, collect the tax payable by the recipient in respect of the supply (with certain limited exceptions as provided in subsection 221(2) of the ETA). Accordingly, the vendor collects the tax as an agent of the Crown, is deemed to hold the tax in trust for the Crown, and is required to remit the tax to the Receiver General. In these situations, the GST is not deductible by the vendor for income tax purposes.

3) GST Uncollected by a Vendor

In some instances, a vendor may fail to collect the GST payable on a taxable supply. This may arise, for instance, where a vendor erroneously believes that a supply of goods or services is GST exempt or is zero rated. The ETA contemplates the application of the GST based on the value of the consideration for a taxable supply. Consequently, where GST on a taxable supply has not been collected as required under subsection 221(1) of the ETA and accounted for in the vendor's net tax calculation, tax will be assessed on the value of the consideration for the supply. Therefore, it must be determined if the amount charged by the vendor represents consideration only (i.e., "tax-extra") or consideration and tax (i.e., "tax-included").

The determination of whether a taxable supply was made on a tax-extra or tax-included basis is a question of fact to be made on a case-by-case basis. Factors such as a vendor's invoicing practices, industry practices and supporting documentation (i.e., invoice or sales agreement) are pertinent in this determination.

a) Tax-Extra Transaction

Where a transaction is determined to be tax-extra after the supply has occurred, the vendor may take steps to collect the GST payable from the purchaser (for example, through the issuance of a second invoice to the purchaser for the GST payable on the supply).

If the purchaser refuses to pay the second invoice, the tax implications will be as follows:

• Where the purchaser pays for the initial supply, the vendor may claim a deduction for a bad debt under paragraph 20(1)(p) of the Act in respect of the uncollected GST (i.e., the second invoice), assuming the conditions of this paragraph are otherwise met (e.g., it is a bona fide bad debt), and net of any GST rebate receivable. We understand that in this circumstance, the vendor would be entitled to a rebate equal to 5/105th of the second invoice; and
• Where the purchaser does not pay either amount (i.e., the initial supply or the GST payable thereon), the vendor may claim a deduction for a bad debt under paragraph 20(1)(p) of the Act for the total uncollected receivable, assuming the conditions of this paragraph are otherwise met, and net of any GST rebate receivable. We understand that in this circumstance, the vendor would be entitled to a rebate equal to 5/105th of the total uncollected receivable (i.e., the full amount of the uncollected GST).

In either case, the vendor must remit the full amount of GST payable on the supply to the Receiver General.

b) Tax-Included Transaction

Where a transaction is determined to be tax-included, it is treated as though GST was included in the consideration and therefore GST was charged by the vendor and paid by the purchaser. In this case, the vendor is considered to have collected the tax as an agent of the Crown such that the subsequent GST remittance to the Receiver General is not deductible by the vendor (see discussion above under "GST Collected by a Vendor").

It is relevant to note that in this case, the vendor and purchaser would likely have treated the original billing as consideration without a GST component. Where GST is determined to have been included in the original consideration, the amounts recorded by the vendor and purchaser for income tax and other purposes (i.e., sales, dispositions, expenses, purchases, capital acquisitions and so forth) will be overstated and should technically be adjusted (including potentially their respective tax returns for the years in question).

4) GST Paid on Employee Benefits

The deductibility of GST paid on employee benefits is discussed in CRA publication T4130 - Employers Guide: Taxable Benefits ("T4130"), which states at chapter 5, that:

"salaries, wages, commissions, and other cash remuneration (including gratuities) you pay to employees are not subject to GST/HST. However, non-monetary means of compensating employees, commonly referred to as fringe or employee taxable benefits, may be subject to GST/HST. For the most part, the GST/HST treatment of these benefits is based on their treatment under the Income Tax Act.

Generally, if a benefit is taxable for income tax purposes, you will be considered to have made a supply of a good or service to the employee. If the good or service that gives rise to the taxable benefit is subject to GST/HST, you are considered to have collected GST/HST on that benefit. However, there are situations where you will not be considered to have collected GST/HST on taxable benefits given to employees."

The employer is considered to have collected GST/HST on a taxable benefit subject to GST/HST at the end of February in the year following the year the employer provided the benefit to the employee. This corresponds with the deadline for calculating employee taxable benefits for income tax purposes and for issuing T4 slips. The amount of GST/HST that the employer is considered to have collected on a taxable benefit is calculated as a percentage of the value of the benefit for GST/HST purposes.

It continues to be our view that we are not aware of any factors that would preclude an employer from deducting the GST/HST paid or payable (in the case of an employer using the cash method of reporting income) in connection with employee benefits provided by an employer. In our view, these payments would in most circumstances be deductible pursuant to the general rules of section 9 of the Act.

Amounts received by the employer as ITCs on the GST remitted to the Receiver General in respect of the employee benefits would be taxable as government assistance pursuant to paragraph 12(1)(x) of the Act. However, the employer may elect under subsection 12(2.2) of the Act to reduce the amount of the expense incurred in the year by all or part of the government assistance received in the year in respect of the expense and which would otherwise be included in income under paragraph 12(1)(x) of the Act.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada 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, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch