6 November 2001 External T.I. 2001-0104525 - GST QUICK METHOD OF ACCOUNTING

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

What is the correct treatment under the Income Tax Act for the GST/HST differential under the "Quick Method" of accounting where registrants collect tax at 7% or 15% and remit a lower amount without claiming input tax credits on current expenses and inventory?

Position:

The amount is taxable.

Reasons:

The difference between the GST/HST collectible or collected on taxable supplies and the amount of net tax remitted, in accordance with the "Quick Method," constitutes income subject to tax under section 9 of the Income Tax Act; since this difference is to be retained by the registrant in lieu of claiming input tax credits for the GST/HST payable or paid on current expenses and inventory.

XXXXXXXXXX 2001-010452

Randy Hewlett, B. Comm.

November 6, 2001

Dear XXXXXXXXXX:

Re: Taxation of the "Quick Method of Accounting" Under the Income Tax Act

We are writing in response to your inquiry requesting written clarification on the Canada Customs and Revenue Agency's interpretation of the implications under the Income Tax Act (ITA) with respect to the GST/HST Quick Method of Accounting (the Quick Method). We also acknowledge your telephone conversation with Randy Hewlett on October 19, 2001.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advanced Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (TSO). However, we are prepared to provide the following comments.

GST/HST registrants are generally entitled under the ITA to deduct the GST/HST payable or paid on deductible business expenses, regardless of the method used under the Excise Tax Act (ETA) to calculate their net tax remittance - the Quick Method or otherwise. An input tax credit (ITC) claimed in respect of the GST/HST payable or paid on deductible business expenses is deemed by subsection 248(16) of the ITA to be government assistance. Paragraph 12(1)(x) of the ITA requires that this government assistance be included in income.

Registrants who have elected to use the Quick Method are not entitled to claim ITCs for the GST/HST payable or paid on their current expenses and inventory under the ETA. The Quick Method remittance rates take into account the ITCs that are generally available to registrants for their current expenses and inventory. Under the Quick Method, registrants remit an amount lower than the actual GST/HST collectible or collected, thereby experiencing an overall net gain that is retained in the business in lieu of claiming ITCs for their current expenses and inventory. As noted, the GST/HST payable or paid on the current expenses and inventory expenses is a deductible business expense under the ITA. As well, the registrant must include in the calculation of business income under subsection 9(1) of the ITA the net gain experienced when using the Quick Method, since this amount is meant to be retained by the registrant in lieu of claiming ITCs for the GST/HST payable or paid on its current expenses and inventory.

Please note that the foregoing comments are given as a general overview of the income tax implications for the Quick Method. We are aware that this matter is the subject of a review by the Ottawa TSO, accordingly, have forwarded a copy of this correspondence to Mr. Jean-Jacques Lefebvre, Assistant Director, Verification & Enforcement Division of the Ottawa TSO. Any further questions on your particular situation should be discussed with audit officials in the TSO.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

cc. Jean-Jacques Lefebvre

Assistant Director
Verification & Enforcement Division
Ottawa Tax Services Office

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