Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 122310
Business Number: [...]
December 20, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Production Proxy to be used by the [...] [Division] of [...] [Company X], and possible refund for the provincial portion of the HST for [...] repair parts
Thank you for your letter of [mm/dd/yyyy] concerning the use of a production proxy under the HST for the [...] [(Division)] of ([Company X]), and a potential refund of the provincial component of the HST similar to the existing refund of the Ontario Retail Sales Tax on [...] repair parts.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
You have also requested information concerning the way of reporting the recaptured input tax credits (RITCs) on the HST form, for the periods where the rate of input tax credit (ITC) recapture is 100%, and for the periods where the ITC recapture rates will decrease to 75%, 50%, 25% and 0% respectively. You would also like to know the tax factor to use after July 1, 2010 to calculate the ITCs on travel expenses incurred by employees.
It is our understanding that [Company X] delivers a variety of commercial and non-commercial services, including [...] primarily in [...] Ontario. [Company X] is registered for GST/HST purposes with Business Number [...].
Through an agreement with [...] [Company Y], [Company X] provides [...], tools, appliances, equipment, supplies and other accessories, as well as the services and facilities necessary to carry out [...] [A] of [...] [B]. The [A] of [B] under the agreement is significantly larger in scope than a mere repair [...].
In [yyyy-yyyy], [Company X's] gross revenues were $[...] for the services that it provides, and $[...] for the [...] [Division].
Interpretation Requested
1. Is the [Division] of [Company X] subject to the RITC requirement regarding specified energy used in the [Division's] operation? If so, how does the [Division] apply for a production proxy? Does its activity fall under production proxy category [#]?
2. Currently, [Company X] can claim a partial refund of Ontario Retail Sales Tax paid on [...] repair parts. You are wondering whether there will be a similar refund provision for the Ontario Value Added Tax portion of the HST. You would like to know how to apply for that refund.
3. You would like to know how to report on the HST form, the amounts of ITC recaptured during the periods that the temporary RITC requirement is in effect.
4. You currently use the formula of 4/104 to calculate the input tax credits on travel expenses incurred by employees. You would like to know whether this formula is 12/112 after July 1, 2010.
Interpretation Given
Based on the information provided, we provide the following interpretation:
1. Use of production proxy by [the Division]
Under the agreement with [Company Y], [Company X] is providing [...], tools, appliances, equipment, supplies and other accessories, as well as the services and facilities necessary to carry out the [A] of [B].
As per the description that you provided, we understand that the work performed by the [Division] is significantly larger in scope than a mere repair. This description may indeed fit the definition of production as provided in section 26 of the New Harmonized Value-added Tax System Regulations, No. 2. However, relief from the requirement to recapture ITCs on energy only applies to energy used for production of tangible personal property intended for sale. Therefore, the energy used by the [Division] is not specified production energy, as defined in section 31 of the Regulations. There is no need, in this case, to use a production proxy since the [Division] is not eligible for the relief from the ITC recapture.
Explanation
In general, only large businesses, those making taxable supplies worth more than $10 million annually, and certain financial institutions, are required to recapture ITCs attributable to the provincial component of the HST. Based on the information that you provided, you are considered to be a large business for the purposes of the RITC requirement, for the recapture period effective July 1, 2010.
Effective July 1, 2010, [Company X] has been subject to the RITC requirement regarding the specified energy used in its operation. A large business is able to elect to use a production proxy to determine what portion of the specified energy that it acquires in Ontario would be considered to be used in the production of tangible personal property for sale. The large business is relieved from the requirement of recapturing the provincial part of the ITCs on that portion of its energy supply.
We have determined that the [Division] is providing a service [...]. It is not involved in the production of tangible personal property intended for sale in Ontario, and consequently, cannot consider that a portion of its energy supply is being used in the production of tangible personal property intended for sale. For the recapture period starting July 1, 2010, you are required to recapture 100% of ITCs for the provincial component of the HST paid on the acquisition of the specified energy used in Ontario by the [Division].
2. Refund of Ontario Retail Sales Tax paid on [...] repair parts
Under the HST, subject to the RITC requirement for large businesses, a person is able to claim an input tax credit for the amount of HST paid on purchases of goods and services for use in the course of its commercial activities, as provided in subsection 169(1) of the ETA. That will apply to the repair parts acquired by the [Division] for use in its operation.
Effective July 1, 2010, the Ontario Retail Sales Tax has been replaced by the provincial portion of the HST. You are able to claim the amount of HST that you pay on the purchase of the repair parts as an input tax credit. There is no additional claim to make in reference to the HST paid on your purchases. As explained above, the amount of HST that you claim as an ITC will be reduced by the portion of the ITCs that you will have to recapture.
3. How to account for RITCs on the GST/HST return
The HST combines the existing 5% federal Goods and Services Tax (GST) with an 8% Ontario part (i.e., the provincial part). The ITC recapture applies to the provincial part of the HST paid by a large business to acquire specified property and services. For purposes of the RITC requirement, "specified property or services" generally means: a road vehicle, fuel used in a road vehicle in Ontario, energy, a telecommunication service, or a meal or entertainment that is acquired, or brought into Ontario, by a large business for use in that province.
As a large business, [Company X] is required to file its GST/HST returns electronically, using GST/HST NETFILE, as provided in the Electronic Filing and Provision of Information (GST/HST) Regulations. If during a recapture period, for example, the [Division] purchases specified property or services for $1,250, it will pay 13% HST for a total of $162.50. From that total, the federal component is $62.50 and the provincial component is $100.
On the GST/HST NETFILE, for reporting periods from July 1, 2010 to June 30, 2015, the [Division], as a large business that is not involved in the production of tangible personal property for sale, will recapture 100% of the provincial component of the HST. You will be required to report the following on your GST/HST NETFILE: the 'gross' ITC of $162.50, and the recaptured ITCs ($100 x 100%). The 'net' ITCs will be calculated by deducting the recaptured ITCs from the gross ITCs, and you will be entitled to claim $62.50 as an ITC for the reporting period in question.
For the recapture period from July 1, 2015 to June 30, 2016, if you purchase specified property or services for the same amount, you will recapture 75% of the ITCs. You will therefore report the gross ITC of $162.50 and the recaptured ITCs ($100 x 75%), for a net allowable ITC of $87.50.
For the recapture period from July 1, 2016 to June 30, 2017, you will recapture 50% of the ITCs and will report the gross ITC of $162.50 and the recaptured ITCs ($100 x 50%), for a net allowable ITC of $112.50. Finally, for the recapture period from July 1, 2017 to June 30, 2018, you will recapture 25% of the ITCs and will report the gross ITC of $162.50 and the recaptured ITCs ($100 x 25%), for a net allowable ITC of $137.50.
For the reporting periods following June 30, 2018, you no longer have to recapture the ITCs and will be entitled to claim the total amount of $162.50 as an input tax credit, which is the total amount of HST that you paid on purchase of goods and services for use in your commercial activities.
For further information on how to account for RITCs, refer to GST/HST Technical Information Bulletin (B-104).
4. Formula to use to calculate the tax on travel expenses incurred by employees
The factor to use when calculating the deemed GST tax paid in respect of travel expenses reimbursed to employees is currently 4/104. If the reimbursement is for goods and services 90% or more of which are taxable supplies acquired in Canada, [Company X] will be allowed to use the tax factor approach, pursuant to section 175 of the ETA. After July 1, 2010, when HST at 13% is paid on travel expenses incurred by employees, for travel in Ontario, the new factor is 12/112.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-0419. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Joseph Mathieu
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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