8 November 1991 Ministerial Correspondence 912424 F - Interaction of GST and Income Tax

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.

Dear Sirs:

Re:  Interaction of GST and Income Tax

We are replying to your letter dated August 21, 1991 concerning various issues which relate to the impact of the GST legislation on the calculation of income for tax purposes.

Your questions are based on the following assumptions:

A taxpayer reports income for income tax purposes on an accrual basis and is a registrant for GST purposes.  The taxpayer incurs GST charges when acquiring goods and services the cost of which are deductible for income tax purposes, when acquiring inventory which remains on hand at the end of the fiscal period and when acquiring fixed assets which are eligible for capital cost allowance.  In this regard, you have asked the following:

1.     The taxpayer may or may not claim an input tax credit for GST purposes in respect of the GST paid on the items described above. What is the income tax treatment of the amounts which may become the subject of a claim for an input tax credit and when does the tax treatment change if, in fact, the taxpayer does make a claim for an input tax credit? For the purpose of the timing aspect to the question, you outline 3 scenarios:

A)        The taxpayer's fiscal period end for income tax purposes and for GST purposes is the same, March 31st.  A GST return is filed subsequent to the year end and no claim is made for the input tax credit.

B)        The same situation as in A) but the taxpayer does make a claim for an input tax credit.

C)        The same situation as in B) but the GST return is filed on March 31, the last day of the fiscal period.

2         Would the answer in 1 change if the fiscal year end for income tax purposes was different from that used for GST purposes?

3.        Would the answer in 1. change if the taxpayer reported the income for income tax purposes on the cash basis as permitted by section 28 of the Income Tax Act (the Act)?

4.     Will Information Circular 77-11 "Sales Tax Reassessments Deductibility in Computing Income" also apply in respect of assessments relating to the GST?

5.      Will Revenue Canada, Taxation be in a position to audit or amend a taxpayer's determination of what supplies qualify for an input tax credit independent of a determination by Revenue Canada, Customs and Excise?

6         Are fines, penalties and interest assessed under the Excise Tax Act in relation to the administration of the GST deductible for income tax purposes?

7.      Is the full amount of GST paid or payable deductible in computing taxable income where the taxpayer is not a GST registrant (such registration not being required in some circumstances under the Excise Tax Act)?

Our Comments

1.     Any GST exigible on an expense otherwise deductible under the provisions of the Act is also deductible in computing income for income tax purposes.  Any GST exigible on the purchase of inventory which is still on hand at the end of the year or on fixed assets would be added to the cost of that inventory or asset as the case may be.  This is so regardless of any input tax credit which may be claimed.

With respect to the timing of the tax implications of the claiming of input tax credits, subsection 248(16) of the Act deems any amount claimed as an input tax credit to be

    "assistance from a government in respect of the property or service that is received by the taxpayer

    (a)  where the amount was claimed by the taxpayer as an input tax credit in a return under Part IX of the Excise Tax Act for a reporting period under that Act,

         (i)       at the time the goods and services tax in respect of the input tax credit was paid or payable, if the tax was paid or became payable in the reporting period, or

         (ii)      if no such tax was paid or became payable in respect of the input tax credit in the reporting period, at the end of the reporting period; or 000199    

    (b)  where the amount was claimed as a rebate with respect to the goods and services tax, at the time the amount was received or credited."

Generally, any input tax credit to be claimed on a GST return will either be included in income under paragraph 12(1)(x) of the Act, will decrease the cost of goods sold or will decrease the capital cost of the asset at the same time that the GST which is paid or payable in respect of the same good or service is claimed as an expense or increases the cost of the inventory or asset.  If the input tax credit is claimed in a GST reporting period subsequent to the period in which the GST was paid, the income inclusion under paragraph 12(1)(x) of the Act or reduction in the cost of the asset or inventory on hand will occur on the last day of the GST reporting period.

2.        The answer in 1. would not be different if the taxpayer's fiscal period for GST differed from the fiscal period for income tax purposes.

3.        The input tax credit will be included in income or will decrease the capital cost of an asset in the same manner as described in 1.  The GST payable in respect of an expense however, would only be deductible when paid if the taxpayer was using the cash basis to report income.

4 Information Circular 77-11 states that in cases where all or part of an amount of a sales tax reassessment is disputed by a taxpayer, the deduction of the amount under dispute will be allowed against income for the year in which it is finally determined.  This policy includes the situation where the amount of an input tax credit previously claimed is added back to a taxpayer's GST liability.  Subsection 248(18) deems the amount of the input tax credit so added back to be a repayment of government assistance at the time of the reassessment.

5.        Revenue Canada, Customs and Excise is responsible for the administration of the Excise Tax Act including the determination of what supplies qualify for an input tax credit.  For the purpose of determining the correct adjustments required in respect of an input tax credit, Revenue Canada, Taxation will rely primarily on the individual's GST returns filed and any notices of assessment or reassessments issued by Revenue Canada, Customs and Excise.

6.        We refer you to Interpretation Bulletin IT-104R "Fines and Penalties" dated June 5, 1978 wherein we state that fines and penalties are not generally deductible. As stated in paragraph 4 of that bulletin, it is not possible to set out specific criteria for those exceptional circumstances where a penalty might be allowed. Interest however, will be allowed as a deduction in respect of an excise tax reassessment provided the GST upon which the reassessment is based is also deductible.

7.        Refer to our comments on question 1.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch