5 August 1997 GST/HST Interpretation HQR0000560 - Memorandum 400-2: Documentary Requirements

                                                                        GST/HST Rulings and Interpretations Directorate
Place Vanier,
Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX                                                                                 K1A 0L5
XXXXX XXXXX
XXXXX
XXXXX                                                                                 Case: HQR0000560

Dear XXXXX

Thank you for fax letter of February 2, 1997, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to reimbursements paid to employees for expenses.

Interpretation Requested

You are concerned about a possible discrepancy in the information contained in the section entitled Reimbursement - General (paragraph 66) of the English and French versions of GST Memorandum 400-2: Documentary Requirements. Specifically, you are concerned about the correct method to categorize reimbursed expenses and claim input tax credits.

In addition, you are concerned about paragraph 3 of Policy Statement P-184: Credit Card Expenses and the Registrant's Use of the 6/106 ths factor for Claiming Input Tax Credits. This paragraph deals with the reimbursement of employee expenses that are all or substantially all for taxable supplies acquired in Canada by the card member. Specifically, you are concerned about the treatment of the reimbursement of employee expenses where the employee is reimbursed for expenses incurred both inside and outside Canada.

Interpretation Given

Registrants may choose one of two methods to claim input tax credits on amounts reimbursed to employees during a particular reporting period:

a) they may calculate the actual tax paid on reimbursed expenses;

b) they may claim an input tax credit based on a factor of 6/106 of the total amount reimbursed.

However, the calculation method must be used consistently within each category of reimbursed amounts throughout the fiscal year.

Registrants who choose to claim input tax credits based on the actual tax paid must meet the documentary requirements prescribed under subsection 169(4) of the Excise Tax Act (ETA). Registrants using the factor approach are not required to meet these documentary requirements provided that proper books and records are maintained. Paragraph 28 of GST Memorandum 400-1-1: Allowances and Reimbursements provides further details with respect to the necessary documentation to be maintained. I have enclosed a copy of this memorandum for your reference.

The French version of GST Memorandum 400-2: Documentary Requirements will be reviewed and revised to ensure it reflects this information.

In addition, I am enclosing a copy of a Revenue Canada "Question and Answer" that discusses the HST and the factor approach for claiming input tax credits on reimbursements paid to individuals.

I note that your letter refers to "category 1 - Airfare, Transportation and Allowances with a GST recovery rate of 7/107 or 7%." The need to separate expenses into "categories" and claim input tax credits in a consistent manner applies to reimbursement amounts under section 175 of the ETA and not to allowances that are provided for under section 174 of the ETA.

Paragraph 3 of the Policy Statement P-184 states "the registrant must have reimbursed the card member for property or services recorded on the credit card statement which are all or substantially all (90% or more) taxable supplies (other than 0% supplies) acquired in Canada by the card member; and,"

Note that the words "all or substantially all" qualifies "taxable supplies acquired in Canada" (i.e., the nature of the supply). Therefore, for reimbursed expenses to be considered under the 90% or more taxable supply rule, they must have been acquired in Canada. This is consistent with the statements made in subparagraph 65(a) of GST Memorandum 400-2: Documentary Requirements.

It is the Department's position that in order to qualify for the use of the 6/106 factor, the qualifier "all or substantially all" applies to the reimbursement of each employee's expenses in each designated expense category.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-7931.

Yours truly,

Suzanne Leclaire
Policy Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

Encl.:   Memorandum 400-1-1
            Q&A 175-HST

b.c.c. :  M. McGlynn, A/Manager, Publications

Legislative References: s. 175, s. 174, s. 169(4)

Memorandum 400-2 and Memorandum 400-1-1

 XXXXX dated 910819, file 11650-6

 XXXXX , dated 930215, file 11650-6

 XXXXX dated 950404, file 11650-7

NCS Subject Code(s): I 6