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 deductible under the ITA? 2 - Is interest assessed on GST deductible for ITA purposes? 3 - Is a penalty assessed under the ETA for late-filed GST deductible for income tax purposes?
Position: 1 - GST is deductible for income tax purposes if it was paid on an expense that is otherwise deductible under the ITA. 2 - An amount paid or payable as interest under Part IX of the ETA, which relates to a GST liability that arose in the course of earning income from a business or property will be deductible provided that the interest accrued during a taxation year that commenced before April 1, 2007. 3 - In this case yes.
Reasons: 1 - IC 77-11 provides for the deductibility of a sales tax reassessment (which would include GST) in computing income under the ITA. It is considered a cost of doing business. 2 -Subparagraph 18(1)(t)(ii) only provides a deduction for interest accrued in a taxation year that commenced before April 1, 2007. 3 - In accordance with section 67.6 of the ITA, fines or penalties that have been imposed after March 22, 2004 are not deductible by a taxpayer. However, one exception is for prescribed penalties. Penalties assessed under paragraphs 280(1)(a), 280(1.1)(a) and 280(2)(a) of the ETA are prescribed penalties for purposes of section 67.6 of the ITA.
April 19, 2011
Seow Prashad HEADQUARTERS
Toronto North Tax Services Office P. Waugh
Large File Case Manager 905-721-5221
Audit
5001 Yonge Street
Toronto ONM2N 6R9
2011-040056
Income Tax Implications for GST reassessment
I am writing in response to your memo dated March 18, 2011, in which you requested our views concerning the income tax implications of a GST reassessment. More specifically, you have enquired whether GST reassessed along with the related interest and penalties is deductible for income tax purposes.
In the situation you have described, the CRA reassessed the taxpayer for additional GST of $XXXXXXXXXX on January 25, 2011 for the reporting period November 1, 2005 to October 31, 2006. Arrears interest of $XXXXXXXXXX and a late filing remitting penalty of $XXXXXXXXXX was also assessed. The GST component assessed consists of the following:
GST collected but not remitted
$ XXXXXXXXXX
Net tax adjustments payable under subsection 225.2(2)
$ XXXXXXXXXX
Reduction of input tax credits
$ XXXXXXXXXX
GST payable on imported taxable supplies
$ XXXXXXXXXX
Total audit adjustments
$ XXXXXXXXXX
Generally, 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.
In view of the above, our comments for each of the GST components assessed are as follows:
GST payable on imported taxable supplies
The CRA's longstanding position on the deductibility of a sales tax reassessment, which includes GST, in computing income under the Income Tax Act (the "ITA") is described in Information Circular IC 77-11, Sales Tax Reassessments - Deductibility in Computing Income. In general terms, if the transactions that gave rise to the GST reassessment were made or incurred by a taxpayer for the purpose of gaining or producing income from a business, the GST imposed on the transactions is also deductible for income tax purposes in accordance with subsection 9(1) of the ITA. Therefore, if the imported taxable supplies are expenses that are normally deductible for income tax purposes, the GST payable on these supplies will also be deductible for income tax purposes.
As outlined in paragraph 2 of IC 77-11, it is the CRA's policy to allow the deduction in the year the liability and the amount are determined, i.e. in the year the sales tax reassessment notice is received. This deduction would include amounts relating to statute-barred years.
GST collected but not remitted
A vendor's obligation to collect GST is imposed under subsection 221(1) of the Excise Tax Act (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. The payment of GST funds held in trust for the Crown is not an outlay or expense incurred for the purpose of gaining or producing income and would be prohibited as a deduction by virtue of paragraph 18 (1)(a) of the ITA. Therefore this GST is not deductible by the vendor for income tax purposes.
Where a taxpayer makes a claim for an input tax credit ("ITC") or a rebate under 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 ITA. The CRA's general position on the taxable status of government assistance is outlined in Interpretation Bulletin IT-273R2 - Government Assistance - General Comments.
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 in accordance with paragraph 12(1)(x) of the ITA. Alternatively, a taxpayer may elect, under subsection 12(2.2) of the ITA, 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 ITA for the year in which the assistance is received, and to reduce the amount of the related expense or outlay (i.e., the election may affect the timing of the income inclusion.) This is discussed in more detail in paragraphs 14 and 15 of IT-273R2.
Where the amount of an ITC previously claimed is added back to a taxpayer's GST liability, subsection 248(18) of the ITA provides that the amount will be treated as a repayment of assistance. Such an amount would accordingly be deductible under paragraph 20(1)(hh) of the ITA in the year it is repaid as a repayment of an inducement, or would increase the cost or capital cost of the related property, or the amount of the expenditure or expenditure pool. The ITC would be considered repaid in the year of reduction. Therefore, for the portion of the GST reassessment that relates to the reduction of ITCs claimed, the amount will be allowed as a deduction for income tax purposes, in the year the liability arises (i.e., the year of assessment), if these ITCs were previously included in income for income tax purposes.
Net Tax Adjustments payable under subsection 225.2(2) of the ETA
In accordance with paragraph 18(1)(a) of the ITA, no outlay or expense is deductible in computing the income of a taxpayer from a business or property except to the extent that is it was made or incurred for the purpose of gaining or producing that income. As noted above, if the imported taxable supplies are expenses that are normally deductible for income tax purposes, the GST payable on these supplies will also be deductible. Where a taxpayer is assessed a positive "net tax adjustment" under subsection 225.2(2) of the ETA, it is presumed that this amount would be deductible for income tax purposes since it is additional GST payable on supplies that would otherwise be deductible for income tax purposes. Likewise, if the "net tax adjustment" results in a decrease to the GST liability, this amount would be added back to income for income tax purposes since the taxpayer would have taken a deduction for GST paid that is now being indirectly "refunded".
Interest
Prior to the introduction of the current version of paragraph 18(1)(t) of the ITA, an amount paid or payable as interest under Part IX of the ETA that related to a GST/HST liability arising in the course of earning income from a business or property was deductible. In accordance with changes introduced by Budget 2006, paragraph 18(1)(t) of the ITA now provides that in computing the income of a taxpayer from a business or property, no deduction shall be made in respect of, inter alia, any amount paid or payable as interest under Part IX of the ETA for taxation years beginning April 2007 or later.
It is the CRA's position that any interest assessed which relates to a GST liability that arose in the course of earning income from a business or property will be deductible provided that the interest accrued during a taxation year that commenced before April 1, 2007. To the extent that the interest accrued in a taxation year that commenced on or after April 1, 2007, it is non-deductible by virtue of subparagraph 18(1)(t)(ii), whether or not that accrued interest relates to a net amount of GST that was due and outstanding prior to April 1, 2007. Any interest accrued during a taxation year that commenced before April 1, 2007 is deductible but only in the year the liability arises (i.e., the year of assessment).
In the situation you have described, interest was assessed for the period October 31, 2006 to January 25, 2011 on a GST reassessment for the taxation year ending October 31, 2006. As noted above, interest that has accrued in a taxation year that commenced on or after April 1, 2007 will not be allowed as a deduction. Therefore, the portion of the interest assessed that relates to the period November 1, 2007 to January 25, 2011 will not be allowed as a deduction. The portion of the interest assessed relating to the period prior to November 1, 2007 will be allowed as a deduction in 2011. (Note: the portion of interest relating to the period November 1, 2006 to October 31, 2007 is allowed since this taxation period commenced prior to April 1, 2007.)
Penalties
In accordance with section 67.6 of the ITA, fines or penalties that have been imposed after March 22, 2004 are not deductible by a taxpayer. However, section 67.6 does not apply to prescribed fines or penalties. Draft regulation 7309 sets out that penalties imposed under paragraphs 280(1)(a), 280(1.1)(a) and 280(2)(a) of the ETA are prescribed for purposes of section 67.6. Therefore, any GST penalty imposed under these provisions after March 22, 2004 will be deductible under the ITA in the year they are assessed.
Timing of GST deduction
Where an assessment is issued increasing the GST payable, when it is determined that the GST is otherwise deductible for income tax purposes, the amount will be allowed as a deduction but only in the year the liability arises (i.e. the year the assessment is issued). Therefore, any GST relating to the January 25, 2011 assessment (including the net reduction in ITCs) that is otherwise allowed as a deduction for income tax purposes will only be allowed as a deduction in 2011 (the period ending October 31, 2011).
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 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 the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
Please let me know if you have any questions.
Yours truly,
Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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