1. EMPLOYEE EXPENSE REIMBURSEMENTS – PRACTICAL STRATEGIES FOR COMPLIANCE
By: Jeffrey Shaw & Jim Day

2. Contents Introduction Meals & Entertainment ITC Recapture
Input Tax Refund Restrictions
Reimbursements & Allowances
Administrative Issues
Audit Activity
Employee Expense Reimbursements – Practical Strategies for Compliance

3. INTRODUCTION
Employee Expense Reimbursements – Practical Strategies for Compliance

4. INTRODUCTION Areas of potential tax exposure
incorrect calculation of ITC/ITRs on allowances
incorrect calculation of ITC/ITRs on expense reimbursements
In general, an input tax credit (“ITC”) or input tax refund (“ITR”) may only be claimed by the recipient of a supply. However, with some special provisions, an employer is permitted to recover tax paid by an employee, where the expense was incurred in respect of the employer’s commercial activities. Similar rules apply to reimbursements and allowances paid to partners by partnerships, or volunteers by charities or public institutions. In some circumstances, an employer may also incur expenses on company credit cards. Where the ITCs on these reimbursements are not calculated correctly, potential tax exposures may result.
Areas of potential tax exposure related to reimbursements and allowances may include the following:
incorrect calculation of ITC/ITRs on expense reimbursements; and
incorrect calculation of ITC/ITRs on allowances.
These issues are discussed in more detail on the following slides.
Employee Expense Reimbursements – Practical Strategies for Compliance

5. INTRODUCTION Potential tax exposures employee reimbursements
employer/employee relationship needed
application of the new simplified factors
ITC/ITRs on non-taxable expenses
factor based on residence of employees
ITC recapture
In order for an employer to claim an ITC/ITR on expenses reimbursed on an expense report, an employer/employee relationship must first exist between the employer and the individual receiving the reimbursement. Where this relationship does not exist, an ITC/ITR cannot be claimed. Therefore, registrants are not entitled to claim ITC/ITRs on expense reimbursements to non-employees (i.e., independent contractors or employees of related companies), unless GST/HST or QST is expressly charged on the expenses being reimbursed to the non-employee.
Organizations are generally required to meet the documentary requirements in order to extract tax on qualifying reimbursements. Rather than extracting the actual GST/HST or QST on individual invoices, which is subject to the documentary requirements, organizations may choose to use the prescribed simplified factors in order to claim ITC/ITRs on employee expense reimbursements. The new factors for the participating provinces are 11/111 for HST incurred on taxable supplies in British Columbia; 12/112 for HST incurred on taxable supplies in Ontario, New Brunswick and Newfoundland and Labrador; and 14/114 for HST incurred on taxable supplies in Nova Scotia. For GST/HST purposes, if the factor is used, it must be used for an entire fiscal year and must be applied consistently within each category of expense and used consistently among employees. Significant GST/HST exposures can occur where an organization fails to use the correct simplified factors and/or fails to use them consistently on employee reimbursements. A simplified factor of 4.5% is available for claiming ITRs on expense reimbursements in Quebec. Where organizations choose to use this factor, it must be applied to all expenses of all employees for the entire fiscal year.
Exposures often occur where organizations try to recover tax on expenses incurred outside of participating provinces. In order to use an HST simplified factor, 90% or more of the expenses must be taxable supplies incurred in participating provinces at the respective HST rate. For example, in order to recover tax using the simplified factor 12/112, 90% or more of the expense must have been subject to tax at 13%. Optimally, organizations should set up separate reports for expenses incurred in each province/territory in Canada, and jurisdictions outside Canada to avoid disputes under audit regarding the appropriate use of a simplified factor. Organizations may set up the employee reimbursement factor based on where an employee resides, rather than where the expenses were incurred. This can result in inaccurate claims where a Ontario employee travels to British Columbia and the 12/112 factor is applied to the expense report to recover the HST paid. Similar issues can result where organizations attempt to recover QST on expenses incurred outside of Quebec. It is also important to remember to account for the ITC recapture on employee expense reimbursements subject to the temporary restrictions (see ITC Recapture section for further details).
Employee Expense Reimbursements – Practical Strategies for Compliance

6. INTRODUCTION Potential tax exposures employee allowances
employer deemed to be recipient
recovery of tax on reasonable allowances
application of new simplified factors for allowances
ITC recapture
Similar to employee reimbursements, an employer is entitled to claim an ITC/ITR in respect of a reasonable allowance paid to an employee.
A person is deemed to have paid HST equal to 12/112 of an allowance paid to an employee for expenses to be incurred in British Columbia; 13/113 of an allowance paid to an employee for expenses to be incurred in Ontario, New Brunswick and Newfoundland and Labrador; 15/115 of an allowance paid to an employee for expenses to be incurred in Nova Scotia and GST equal to 5/105 of an allowance paid to an employee for expenses to be incurred in any other province or territory.
In order for HST to be recoverable with respect to an allowance, it must be:
paid in respect of supplies acquired in an HST province, at least 90% of which are taxable;
deductible for income tax purposes; and
considered reasonable by the employer at the time of payment.
Similarly, organizations are also deemed to have paid QST on an allowance paid to an employee for expenses to be incurred in Quebec.
Care should be taken by an employer to ensure that all the requirements have been met before claiming an ITC/ITR on employee allowances to avoid an exposure. It is important to remember to account for the ITC recapture on allowances subject to the temporary restrictions (see ITC Recapture section for further details).
Employee Expense Reimbursements – Practical Strategies for Compliance

7. MEALS & ENTERTAINMENT
Employee Expense Reimbursements – Practical Strategies for Compliance

8. MEALS & ENTERTAINMENT Special rules govern ITCs/ITRs relating to meals
100% restriction
50% restriction
no restriction
Since the legislation was designed to provide a recovery of tax on expenses relating to an organization’s commercial activities, it will generally deny the recovery of tax where the expenses are somewhat personal in nature.
Many of these restrictions can also be found in the Income Tax Act (“ITA”).
Employee Expense Reimbursements – Practical Strategies for Compliance

9. MEALS & ENTERTAINMENT Personal use restriction club membership fees
100% restricted
home office expenses
GST
QST
unreasonable expenses
Personal use restriction
There is a 100% ITC/ITR restriction for initiation fees, membership fees or dues to any club, the main purpose of which is to provide dining, recreational or sporting facilities. These provisions parallel the ITA, which also denies a deduction for these types of expenses.
For example:
golf club membership dues;
business clubs;
fitness club memberships; and
certain Board of Trade memberships.
Goods and services acquired in relation to a home office are generally restricted, unless the work space is the principal place of business or is used exclusively to earn business income and is used on a regular or continuous basis to meet clients. Even if these tests are met, the Quebec legislation claws back 50% of the ITR on these expenses on a yearly basis.
No ITCs/ITRs may be claimed for tax paid on goods or services except to the extent that the consumption or use of the goods or services is reasonable having regard to the nature of the registrant’s commercial activities. The consideration on which the tax is charged must also be reasonable.
Employee Expense Reimbursements – Practical Strategies for Compliance

10. MEALS & ENTERTAINMENT Personal use restriction exclusive personal use
exceptions
GST/HST
QST
Personal use restriction
There is also a 100% ITC/ITR restriction for tax paid on supplies purchased for the exclusive personal use or consumption of an officer or employee, or someone related to an officer or employee, of an organization. Examples include long service recognition gifts and sales staff rewards.
Employers are able to give employees non-cash gifts and awards, on a tax-free basis, for special occasions such as Christmas, a wedding or similar events, where the total cost of the gifts is $500 or less in a year. The total value in excess of $500 will be considered a taxable benefit and subject to the ITC restriction.
Non-cash employee long service/anniversary awards may also qualify for non-taxable status to the extent that the total value is $500 or less, as long as they are only provided every five years. Any amount of the award in excess of $500 will be considered a taxable benefit and subject to the ITC restriction.
The employer is able to deduct the cost of these qualifying gifts and awards when calculating business income and the gift or award will not be considered a taxable benefit to the employees receiving them.
This policy does not apply to cash or near-cash gifts and awards or amounts exceeding the $500 threshold.
Quebec follows a similar policy for ITR purposes. However, Quebec will also permit gift certificates, gift cheques and smart cards that can only be used to buy goods or services at identified merchants to be given to employees tax-free within the $500 limits.
Employee Expense Reimbursements – Practical Strategies for Compliance

11. MEALS & ENTERTAINMENT Most expenses subject to 50% restriction
follows the Income Tax Act restrictions
QST implications
small and medium-sized businesses
large businesses
HST implications
large businesses in British Columbia and Ontario
ITCs (and ITRs for small and medium-sized businesses only) are restricted to 50% of the tax paid with respect to meals and entertainment expenses, where the deductibility of the expense is restricted to 50% under the ITA (Quebec Taxation Act for QST purposes). For QST, large businesses continue to be denied ITRs in respect of these types of expenses. In addition, large businesses in British Columbia and Ontario are generally required to recapture ITCs for the provincial portion of the HST paid on meals and entertainment expenses (see the ITC Recapture section for more details).
In addition to common business meal expenses, the limitation also applies to:
tickets to sporting events, such as hockey, baseball and football;
tickets to theatres and concerts;
boat cruises and admissions to places of amusement; and
the cost of box rentals at arenas and stadiums.
The restriction applies to payments made directly by a registrant, as well as to allowances and reimbursements paid in respect of these types of expenses to employees.
Registrants may choose to treat this restriction in one of two ways. ITCs (and ITRs where applicable) may be claimed in the reporting period in which they are incurred. However, the registrant is required to make an adjustment at the end of its fiscal year to recapture 50% of the tax claimed in the prior year. Alternatively, an organization may choose to simply record the recovery net of the restriction during the year and thereby avoid the year-end calculation altogether.
Employee Expense Reimbursements – Practical Strategies for Compliance

12. MEALS & ENTERTAINMENT Most expenses subject to 50% restriction
long-haul truck driver meals
Exception
Along with the 2008 GST rate change, amendments were introduced to change the deductible portion of long-haul truck driver meals during eligible travel periods. The deductible portion was raised from the standard meals and entertainment limit of 50% to 60% for expenses incurred on or after March 19, 2007, and before January 1, 2008, with a 5% increase each year thereafter until the limit reached 80% for expenses incurred after December 31, 2010.
As a result, the deductible portion of qualifying long-haul truck driver meals is now 80%.
Furthermore, since these long-haul truck driver meals are no longer subject to the 50% meals and entertainment limits for purposes of the ITA, GST/HST registrants may claim full ITCs on the tax paid in respect of these meals.
Employee Expense Reimbursements – Practical Strategies for Compliance

13. MEALS & ENTERTAINMENT Exceptions to the 50% restriction
full ITCs/ITRs generally available to
public institutions
Charities
does not extend to
municipalities
large business public institutions
restriction does not apply to rebates
Exceptions to the 50% restriction
The 50% meals and entertainment expense restriction does not apply to ITCs/ITRs claimed by a charity or public institution (i.e., a charity that is a school authority, hospital authority, public college, university and certain local authorities deemed to be municipalities).
Such bodies may claim ITCs and ITRs, to the extent otherwise entitled, in respect of tax paid on such expenses without restriction. A charity or public institution that is a registrant may generally claim full ITCs/ITRs for tax paid on food, drink and entertainment expenses where they are incurred in the course of commercial activities. However, public institutions that qualify as a large business for QST purposes continue to be subject to the ITR restrictions.
A municipality (other than an organization that is determined to be a municipality) is not considered to be a public institution; as a result, it is subject to the 50% restriction on ITCs/ITRs for meals and entertainment.
The meals and entertainment expense restriction does not apply to rebate claims made by public service bodies. As a result, organizations that are entitled to claim rebates in respect of tax paid on meals and entertainment relating to non-commercial activities are not required to adjust their rebate claims for the 50% restriction. This applies to all organizations that claim rebates and not just charities and public institutions.
Employee Expense Reimbursements – Practical Strategies for Compliance

14. MEALS & ENTERTAINMENT Exceptions to the 50% restriction
full ITCs/ITRs are available where the expense is
generally available to all employees
specifically rebilled to another party
related to a remote or special work site
Exceptions to the 50% restriction
There are eight main exceptions to the 50% restriction for income tax purposes. As a result, full ITCs/ITRs are available. These include:
meals and entertainment made generally available to all employees at a particular location (limited to 6 occasional events per year);
meals and entertainment for which a taxpayer is compensated by another party, and the amount for meals and entertainment is specified on the billing to the other party;
meals and entertainment expenses made on behalf of employees at a remote or special work site;
meals and entertainment provided by a registered charity as a fund-raising event;
meals and entertainment on an airplane, train or bus, which are included in the fee for travel;
amounts required to be included in an employee's taxable benefit calculation;
meals and entertainment acquired by persons in the business of providing meals and entertainment who would normally provide them for compensation (i.e., restaurants, caterers, nightclubs, etc.); and
long-haul truck driver meals during eligible travel periods.
Employee Expense Reimbursements – Practical Strategies for Compliance

15. ITC RECAPTURE
Employee Expense Reimbursements – Practical Strategies for Compliance

16. ITC RECAPTURE Overview temporary ITC recapture for “large businesses”
public service bodies
similar to Quebec ITR restrictions
Overview
British Columbia and Ontario’s sales tax harmonization includes temporary restrictions on the claiming of ITCs on a number of expenses by “large businesses”. This ITC recapture applies only to the provincial component of the HST and will be in place for five years. After the initial five year period, the recapture will be phased out equally over the next three years, at which time, the recapture will be eliminated entirely.
This temporary ITC recapture is not applied to the federal portion of the HST (i.e., GST). In addition, this recapture is not expected to apply to the provincial portion of the HST that is collected in the existing participating provinces (i.e., Nova Scotia, New Brunswick and Newfoundland and Labrador).
Recapture will only apply to “large businesses” which are defined as businesses with annual taxable sales in the fiscal year immediately preceding the recapture period, that are made through a Canadian permanent establishment or associated Canadian permanent establishment (including zero-rated sales) in excess of $10 million and certain financial institutions.
British Columbia and Ontario have both stated that a public service body would not be considered to be a large business. Therefore, the ITC recapture requirements that will be placed on large businesses in Ontario and British Columbia will not apply to any public service bodies.
Both provinces have modeled their ITC recapture on the ITR restrictions in place for QST purposes.
Employee Expense Reimbursements – Practical Strategies for Compliance

17. ITC RECAPTURE Temporary ITC recapture telecommunications
meals and entertainment
energy not used to manufacture goods
licenced road vehicles
fuel for licenced road vehicles
Temporary ITC recapture
“Large businesses” are generally not be permitted to claim ITCs for the provincial portion of the HST paid on the following purchases:
telecommunication services (excluding internet access and numbers);
meals and entertainment expenses;
energy not used to manufacture goods for sale or in farming operations;
licenced road vehicles under 3,000 kilograms (and associated parts and certain services); and
fuel for licenced road vehicles (restricted in Ontario only).   
It must be pointed out that only Ontario has temporary ITC recapture on the provincial component of the HST paid to acquire fuel, such as gasoline, for use in a licenced road vehicle. British Columbia has chosen to provide a point of sale rebate for the provincial component of the HST that would have applied to the purchase of fuel and, therefore, will not have ITC recapture placed on purchases of fuel – no ITC recapture required as there is no tax to pay.
Both provinces have confirmed that where any of the items subject to recapture are purchased for resale purposes, the temporary ITC recapture will not apply to the tax paid.  Therefore, a company incurring expenses subject to recapture (i.e., meals and entertainment expenses) that will be re-invoiced to a customer will be eligible to claim an ITC on the full HST paid.
Employee Expense Reimbursements – Practical Strategies for Compliance

18. ITC RECAPTURE Telecommunication services
items not subject to recapture
internet access and web site hosting
1-800 and other toll-free services
telecommunications equipment
equipment repairs and maintenance
non-telecommunication services
Telecommunication services
Although large businesses must generally recapture ITCs on the provincial component of HST paid or payable in respect of telecommunication services, they are not required to recapture the provincial component of the HST paid in respect of internet access services and web-site hosting services.
Telecommunication services that are provided wirelessly and include internet access or access to electronic mail are not considered to be “internet services” and, consequently, are subject to the ITC recapture requirements. Common examples of these services include Blackberry and similar featured services.
Similarly, recapture is not required with respect to the purchase of a "1-800" or other toll-free service (which includes the related line rental), or optional services, such as long distance call routing, overflow routing, interactive voice response and calling number identification. 
The provincial component of the HST paid on the purchase, lease and rental of telephone systems, paging equipment and any associated installation, parts or repairs for such equipment, remains eligible for full ITCs, even though any related telephone and telecommunications services acquired by the large business may be subject to recapture.
The purchase of non-telecommunication services, including directory advertising, building surveillance or protection services, news services offered by press agencies, telephone order management services, database access services, services provided through lines, and directory assistance services, are all eligible for full ITCs on the HST paid to acquire them. 
Currently, telecommunication suppliers, as experts in their service offerings, often indicate on their invoice to customers the recoverable and non-recoverable portions of the QST charged on their services. Many telecommunication suppliers are now providing a similar indication of the breakdown between supplies that are not restricted and supplies that are subject to the ITC recapture requirements.
Employee Expense Reimbursements – Practical Strategies for Compliance

19. ITC RECAPTURE Restricted meals and entertainment
expenses subject to the 50% income tax limitation
exceptions to the 50% income tax limitation
not restricted
Restricted meals and entertainment
As previously discussed, ITCs are generally restricted to 50% of the tax paid with respect to meals and entertainment expenses, where the deductibility of the expense is restricted to 50% under the ITA. These same meals and entertainment expenses are also subject to the temporary ITC recapture requirements for the provincial portion of the HST that have been placed on large businesses.
There are eight main exceptions to the 50% income tax restriction, for which full ITCs are available:
where meals and entertainment are made generally available to all employees at a particular location (limited to 6 occasional events per year);
meals and entertainment for which a taxpayer is compensated by another party, and the amount for meals and entertainment is specified on the billing to the other party;
where these expenses are made on behalf of employees at a remote or special work site;
meals and entertainment provided by a registered charity as a fund-raising event;
meals and entertainment on an airplane, train or bus, which are included in the fee for travel;
where the amount is required to be included in an employee's taxable benefit calculation;
where the provider is in the business of providing meals and entertainment, and would normally provide them for compensation (i.e., the restrictions do not apply to restaurants, caterers, nightclubs, etc.); and
long-haul truck driver meals during eligible travel periods.
Purchases of meals and entertainment expenses that qualify for one of the exceptions noted above are also not subject to the temporary ITC recapture requirements.

20. ITC RECAPTURE Licenced road vehicles
purchase, lease or rental of vehicles less than 3,000 kg
“curb” weight at registration
repairs and maintenance
fuel
Licenced road vehicles
A large businesses will be restricted from claiming ITCs on the provincial component of HST related to the supply (i.e., purchase, lease or rental) of a road vehicle that is licensed, or required to be licensed, under applicable provincial laws for use on a public highway where the weight of the vehicle is less than 3,000 kilograms (kg). 
When assessing the weight of a specified road vehicle, it is important to note that the “curb weight” of a vehicle and not the “gross vehicle registration weight” should be used. The curb weight is the weight of a vehicle without passengers or cargo, but with a full tank of fuel and engine fluids. Whereas, the gross vehicle registration weight is the maximum weight of a vehicle and any load to be carried. In some cases, the difference between these two measures could result in an incorrect conclusion that a particular licensed road vehicle is not subject to the RITC requirements.
Full ITCs are available on the HST paid for normal repair and maintenance performed on licenced road vehicles. However, ITCs must be recaptured on the provincial component of HST for parts that are not considered repair and maintenance parts (i.e., after-market equipment) and are purchased for a vehicle within twelve months of a car being purchased in or transferred into Ontario or British Columbia.
If a large business acquires a specified motor vehicle, but uses the vehicle before reselling the vehicle (e.g., a dealership demonstrator), the large business would be required to recapture a portion of the ITCs claimed when the vehicle was acquired. For each month, or part thereof, the large business uses the vehicle, it must recapture 2 percent of the provincial component of the ITC attributable to the cost of the vehicle.
Registrants in Ontario will be subject to the RITC requirement on the purchase of fuel for use in vehicles weighing less than 3,000 kilograms that are required to be registered on a public highway. However, the purchase of fuel acquired for vehicles having a gross mass equal to or exceeding 3,000 kilograms is eligible for a full ITC. Additionally, full ITCs are available for the use of diesel fuel (i.e., “fuel oil”) regardless of vehicle weight. This recapture will not apply to any purchases of fuel for these same vehicles in British Columbia, since a point-of-sale rebate for the provincial component of the HST will apply to these supplies.
Employee Expense Reimbursements – Practical Strategies for Compliance

21. ITC RECAPTURE Reporting requirements
may not simply forego claiming ITCs
amount must be “recaptured”
GST/HST returns filed using NETFILE
Ontario and British Columbia recapture tracked separately
request for adjustment
significant penalties may apply
Reporting requirements
Large business cannot simply forego claiming an ITC on the provincial portion of the HST incurred on purchases subject to ITC recapture to satisfy their compliance obligations, as can be done when dealing with the similar QST ITR restrictions. Large businesses are required to repay or “recapture” ITCs for the provincial portion of the HST paid in British Columbia and Ontario on restricted items.
Registrants who are subject to the recapture are required to file their GST/HST returns using NETFILE, and report their gross input tax credits on one line, with separate recapture fields for the restricted provincial component of HST in British Columbia and Ontario. As a result, many organizations will need to separately track the provincial component of the HST on the expenses subject to recapture in order to accurately complete their GST/HST returns
Where a large business has incorrectly reported its recapture in a particular period, the CRA requires that a letter be sent to the local Tax Centre requesting an adjustment to its GST/HST return. The CRA has indicated that where a taxpayer fails to report its recaptured ITCs in the proper period, a penalty may be applied. Current regulations call for a penalty of 5% to be applied to a misreported recapture amount for the period the error is made in, and an additional 1% penalty to be applied for each month the amount remains misreported, to a maximum of 5 months. In effect, a misreported recapture amount could, within 6 months, be subject to a 10% penalty.
It should be noted that the filing of the letter to request an adjustment to a recaptured amount may trigger the assessment of the above noted penalty and, more importantly, may prompt the CRA to initiate an audit of the organization, particularly where adjustments to the ITC recapture amounts are relatively common occurrences.
Employee Expense Reimbursements – Practical Strategies for Compliance

22. INPUT TAX REFUND RESTRICTIONS
Employee Expense Reimbursements – Practical Strategies for Compliance

23. INPUT TAX REFUND RESTRICTIONS
licensed road vehicles
fuel for licensed road vehicles
telecommunication services
meals and entertainment
electricity and gas not used in manufacturing
Restricted expenses
“Large businesses” – businesses, including members of an associated group, that have annual sales in excess of $10 million – are generally not permitted to claim input tax refunds for QST paid on the following purchases:
licensed road vehicles, except for road vehicles weighing 3,000 kg or more;
fuel for licensed road vehicles, except for diesel fuel and fuel oil used in commercial activities to power the engines of road vehicles registered to travel on public roads;
telephone and telecommunications services, except for “1-800” services and Internet services;
meals and entertainment expenses subject to the 50% income tax limitation; and
electricity, gas, steam and other combustibles not used in manufacturing.
These restrictions also apply to these expenses when they are included on an employee expense reimbursement.
Employee Expense Reimbursements – Practical Strategies for Compliance

24. REIMBURSEMENTS & ALLOWANCES
Employee Expense Reimbursements – Practical Strategies for Compliance

25. REIMBURSEMENTS & ALLOWANCES
Recovery of tax on reimbursements made to employees,
partners or volunteers
subject to general documentary requirements
subject to 50% meals and entertainment expense restriction
subject to ITC recapture for provincial component of HST (British Columbia & Ontario)
The general rule for claiming ITCs/ITRs requires that the person claiming the credit/refund be the person who is liable to pay the consideration for the supply (i.e., the recipient of the supply). Without some special provisions under the ETA and QSTA, an employer would not normally be permitted to recover tax paid by an employee even where it was incurred in respect of the person’s commercial activities.
An employer, partnership, charity or public institution is deemed under the legislation to have paid tax where the expense was reimbursed to an employee, partner or volunteer who paid tax in respect of a property or service that was acquired or imported for use in the activities of the person.
A reimbursement is understood by the CRA to mean “a payment by an employer to an employee to repay the employee for amounts spent by the employee on the employer’s business.”
Organizations are still generally required to meet the documentary requirements in order to extract tax on qualifying reimbursements. In addition, large businesses in Quebec must also take into account the ITR restrictions.
The 50% meals and entertainment expense restriction applies to ITC (and ITRs for small and medium-sized businesses in Quebec) claimed for restricted meals and entertainment expenses included on an employee expense report.
The ITC recapture applicable to the provincial component of the HST incurred on five (four in British Columbia) categories of expenses incurred by large businesses in British Columbia and Ontario also apply to these expenses when included on an expense report.
Employee Expense Reimbursements – Practical Strategies for Compliance

26. REIMBURSEMENTS & ALLOWANCES
Prescribed simplified factor – GST/HST
available for expenses incurred in Canada
generally 4/104
11/111, 12/112 or 14/114 where all or substantially all the expenses were subject to HST
As an alternative to meeting the general documentary requirements, which are often lacking on expense reports, organizations may choose to use the prescribed simplified factors in order to determine input tax credits.
For GST/HST purposes, the factors are:
4/104 (subject to the 50% reduction for meals and entertainment expenses) where all or substantially all of the expenses are taxable (other than zero-rated) supplies; or
11/111 (BC HST), 12/112 (ON, NL & NB HST), and 14/114 (NS HST) (subject to the 50% reduction for meals and entertainment expenses and large business RITC requirements in BC & ON) where all or substantially all (90% or more) of the supplies for which the reimbursement is made are taxable supplies acquired in participating provinces.
The factor is set at 4/104 (or 11/111, 12/112 or 14/114 in the participating provinces) to take into account tips and other non-taxable expenses. Other than the different factors used for expenses incurred in a particular participating province, the factor does not vary depending on which province the expenses were incurred (e.g., MB vs. AL). However, the factor is not available for expenses incurred outside of Canada.
If the factor is used, it must be used for an entire fiscal year and must be applied consistently within each category of reimbursed expenses. It cannot be used to “cherry pick” GST/HST for ITC purposes where particular invoices or receipts do not adequately disclose GST/HST charged or meet other documentary requirements. Nor may it be used inconsistently from employee to employee, depending on the degree of documentation provided by a particular employee.
Employee Expense Reimbursements – Practical Strategies for Compliance

27. REIMBURSEMENTS & ALLOWANCES
Simplified methods - QST
available for expenses incurred in Quebec
4.5% – LB simplified method
8/108 – SMB simplified method
For QST purposes, the large business simplified method (LB simplified method) using the specified percentage of 4.5% (4.1% prior to January 1, 2011) is available to large businesses to extract the QST incurred in Quebec from an expense report containing expenses that relate exclusively (90% or more) to taxable, other than zero-rated, supplies. If the 90% requirement is not satisfied (i.e., the expense report includes more than 10% exempt or zero-rated supplies), a registrant that has adopted the LB simplified method may not claim ITRs on that particular expense report.
Organizations using the LB simplified method must ensure that:
the specified percentage is applied to all expenses of all employees for the entire fiscal year; and
the expenses are reimbursed through an expense report.
The TVQ bulletin that discusses this method indicates that if a registrant elects to use the LB simplified method, it must also be applied to any trip expenses paid directly to suppliers which relate to expenses reimbursed on an expense report. For example, QST paid on airfare paid directly to the supplier (by the company) that relates to a business trip for which the employee has submitted an expense report is also subject to the LB simplified method.
Revenue Quebec has indicated that the acquisition of a road vehicle under 3,000 kilograms or the rental of such a vehicle for more than 30 days is not eligible for use of the LB simplified method.
The LB simplified method cannot be used to recover QST for which no ITRs would be permitted due to another provision, other than the restrictions on large businesses (e.g., personal use purchases or unreasonable allowances).
Businesses not subject to the ITR restrictions may claim ITRs on employee expense reports using the small and medium-sized business simplified method, with utilizes a specified factor of 8/108, subject to similar conditions as for the GST/HST simplified factor.
Employee Expense Reimbursements – Practical Strategies for Compliance

28. REIMBURSEMENTS & ALLOWANCES
Allowances paid to employees, partners or volunteers
allowance must be reasonable under the Income Tax Act
subject to 50% meals & entertainment expense restriction
A similar deeming rule applies to allowances paid by an employer, partnership, charity or public institution, deeming tax to have been paid on the underlying expense in respect of qualifying allowances paid to an employee, partner or volunteer.
A person is deemed to have paid tax equal to:
5/105 for GST purposes where all or substantially all of the expenses are taxable supplies (other than zero-rated supplies);1 or
12/112 (BC HST), 13/113 (ON, NL & NB HST) or 15/115 (NS HST) for HST purposes where all or substantially all (90% or more) of the allowance relates to taxable supplies acquired in Canada1; and
8.5/108.5 for QST purposes where all or substantially of the allowance relates to expenses incurred in Quebec (subject to the ITR restrictions for large businesses).
1 subject to the 50% restriction for meals and entertainment expenses and large business RITC requirements in ON & BC
For HST purposes, where 90% or more of the supplies related to an allowance are made in a particular participating province, that province’s factor should be used to claim the ITC. If, however, 90% or more of the supplies to which the allowance relates are made in two or more participating provinces, then the factor used to claim the ITCs is the lowest factor available for the provinces where the supplies are made.
Examples of reasonable allowances that may be eligible for ITCs/ITRs include: board and lodging allowances for special work sites or remote locations; overtime meal allowances (GST/HST only – subject to RITC in BC & ON); allowances for special uniforms/clothing; and car allowances (subject to RITC in BC & ON).
In order for tax to be recoverable with respect to an allowance, it must be:
paid in respect of supplies acquired in Canada/Quebec, at least 90% of which are taxable;
deductible for income tax purposes; and
considered reasonable by the employer at the time they are paid.
Employee Expense Reimbursements – Practical Strategies for Compliance

29. REIMBURSEMENTS & ALLOWANCES
Automobile allowances
based only on business kms
rate per km is reasonable
52 cents per km for the first 5,000 kms
46 cents per additional km
no additional automobile reimbursements
Automobile allowances are considered to be reasonable where:
the allowance is based solely on the number of business kilometres driven;
the rate per kilometre is reasonable; and
the recipient of the allowance is not reimbursed in whole or in part for automobile expenses, in addition to the allowance.
Flat rate periodic allowances (e.g., $400 per month) generally will not be considered reasonable.
Effective January 1, 2001, where an employee is paid a combination flat rate and reasonable per kilometre allowance, no ITCs are allowed for either the per kilometre allowance or the flat rate portion.
The 2011 tax-deductible per kilometre allowance limits for both GST/HST and QST purposes are 52 cents per kilometre for the first 5,000 kilometres, and 46 cents per additional kilometre. Note that these rates were the same for The limits are each 4 cents higher in the territories.
Automobile allowances qualifying for ITCs and paid by large businesses in British Columbia and Ontario are subject to the ITC restrictions for the provincial component of the HST.
Employee Expense Reimbursements – Practical Strategies for Compliance

30. REIMBURSEMENTS & ALLOWANCES
Allowances paid to employees, partners or volunteers
QST
LB simplified method
For QST purposes, where an allowance is paid by a large business in respect of restricted expenses and is paid through an expense report, an organization may use the LB simplified method specified percentage of 4.5% (assuming the organization qualifies to use and is using the LB simplified method for expense reimbursements).
For 2011, Revenue Quebec has adopted the same per kilometre allowance limits for reasonable automobile allowances as the federal government. These limits are 52 cents per kilometre for the first 5,000 kilometres and 46 cents per additional kilometre. These limits remain unchanged from the limits in place for the years 2008 through 2010.
As with GST/HST, where the employee receives a flat rate car allowance, or a combination flat rate car allowance and a reasonable per kilometre allowance, no input tax refunds are available and the allowances become a taxable benefit to the employee.
Employee Expense Reimbursements – Practical Strategies for Compliance

31. REIMBURSEMENTS & ALLOWANCES
Reimbursements to non-employees
potential exposure areas
re-supply of “exempt” costs
GST/HST and QST are value-added taxes, which require suppliers to charge tax on the full consideration charged for taxable goods or services. Where a supplier includes a charge for the reimbursement of costs or expenses, other than as a legal agent of the recipient, the charge for the reimbursement is considered to be additional consideration for the supply. As a result, tax must be charged on the full amount, including any reimbursements.
Even where the customer is provided with copies of the vendor’s supplier invoices for reimbursement, given that the customer is not the “recipient” of the underlying invoices, it is not permitted to claim an ITC/ITR. These invoices will have been issued to the vendor. The vendor must claim the ITCs/ITRs and expressly charge tax to the customer in order for the tax to be recovered by the ultimate recipient.
Since the “re-supply” of out-of-pocket expenses forms part of the consideration for the supply, organizations may find themselves paying tax on supplies that normally would not be taxable. For example:
salaries and wages;
zero-rated air travel; and
expenses incurred outside Canada.
Where the supplier is not registered, any tax incurred by that person is not recoverable and will ultimately form part of the cost of the supply.
Employee Expense Reimbursements – Practical Strategies for Compliance

32. ADMINISTRATIVE ISSUES
Employee Expense Reimbursements – Practical Strategies for Compliance

33. ADMINISTRATIVE ISSUES
Calculation of recapture on meals and entertainment expenses
actual method
$100 + $13 HST + $10 gratuity = $123
RITC: $13.00 x 50% x 8/13 = $4.00
ITC: $13.00 x 50% x 5/13 = $2.50
simplified factor method
RITC: $ x 12/112 x 50% x 8/13 = $4.05
ITC: $ x 12/112 x 50% x 5/13 = $2.54
Where an employee is being reimbursed or paid an allowance in respect of a meal subject to the 50% income tax limitation, the 50% GST/HST restriction is applied first, followed by the recapture of ITC requirement.   
For example, if a large business in Ontario reimburses an employee for meal expenses of $123 ($100 + $13 HST + $10 gratuity), the ITC would be restricted by 50% per section 236 of the ETA, for a gross ITC of $6.50 ($13 x 50%). 
Under the actual method, the large business would be required to report $4.00 ($6.50 x 8/13) as the recapture of the provincial component of HST.  In this example, the net ITC would be $2.50 ($6.50 less $4.00 recapture).
Under the simplified factor method, the large business would be required to report a gross ITC of $6.59 ($123 x 12/112 x 50%) and $4.05 ($6.59 x 8/13) as the recapture of the provincial component of HST.  In this example, the net ITC would be $2.54 ($6.59 less $4.05 recapture or $6.59 x 5/13).
Employee Expense Reimbursements – Practical Strategies for Compliance

34. ADMINISTRATIVE ISSUES
Calculation of recapture on a meals and entertainment
allowance
Recaptured ITC
$ x 13/113 x 50% x 8/13 = $3.54
ITC
$ x 13/113 x 50% x 5/13 = $2.21
For example, if a large business in Ontario provides an employee with an allowance for meal expenses of $100 ($100 including HST), the ITC would be restricted by 50% per section 236 of the ETA.
The large business would be required to report a gross ITC of $5.75 ($ x 13/113 x 50%) and $3.54 ($5.75 x 8/13) as the recapture of the provincial component of HST.  In this example, the net ITC would be $2.21 ($5.75 less $3.54 recapture or $5.75 x 5/13).
Employee Expense Reimbursements – Practical Strategies for Compliance

35. ADMINISTRATIVE ISSUES
Calculation of recapture on an employee vehicle allowance
recaptured ITC
300 kms at $0.46 = $138
RITC: $ x 13/113 x 8/13 = $9.77
Net ITC: $ x 13/113 x 5/13 = $6.11
Vehicle allowances are considered reasonable where all of the following conditions are met:
the allowance is based solely on the number of business kilometres driven;
the rate per kilometre is reasonable; and
the recipient of the allowance is not reimbursed in whole or in part for car expenses, in addition to the allowance.
Flat rate periodic allowances (e.g. $400 per month) generally will not be considered reasonable.
Where an employee is paid a combination flat rate and reasonable per kilometre allowance, no ITCs are allowed for either the per kilometre or flat rate portion of the allowance.
The current per kilometre allowance limits are 52 cents per kilometre for the first 5,000 kilometres and 46 cents per additional kilometre.
For example, a large business reimbursing an employee in Ontario for 300 km of travel at the 46 cents per km, will report a gross ITC of $15.88 (300 km x .46 x 13/113) and $9.77 ($15.88 x 8/13) as the recapture of the provincial component of HST.  In this example, the net ITC would be $6.11 ($15.88 less $9.77 recapture or $15.88 x 5/13).
Employee Expense Reimbursements – Practical Strategies for Compliance

36. SIMPLIFIED EXPENSE REPORT
Employee Expense Reimbursements – Practical Strategies for Compliance

37. SIMPLIFIED EXPENSE REPORT
Employee Expense Reimbursements – Practical Strategies for Compliance

38. AUDIT ACTIVITY
Employee Expense Reimbursements – Practical Strategies for Compliance

39. AUDIT ACTIVITY Audit behavior related to employee reimbursements
Routinely scrutinized
errors are typically made
Compliance with new complicated rules and factors
ITC recapture
Rules for factors
GST/HST vs. QST
During a GST/HST or QST audit, an organization can expect to have employee reimbursements and allowances scrutinized thoroughly by the auditor. This is due to the fact that registrants regularly make errors in calculating the recovery of tax on these transactions. This can result from not meeting the documentary requirements where the actual method is used or by not using the simplified factors that are available for these expenses on a consistent basis when these methods are employed.
Organizations often create exposures by using the available simplified factors to “cherry pick” GST or QST for ITC/ITR purposes where particular invoices or receipts do not adequately disclose the tax charged or meet other documentary requirements. Other businesses use these factors inconsistently from employee to employee, depending on the degree of documentation provided by a particular employee. This also creates exposures. Remember, where the factor is used, it must be used for an entire fiscal year and must be applied consistently within each category of reimbursed expenses. For QST purposes, the simplified factor must be used for all expenses included on an expense report.
In addition, auditors will now focus on how well large businesses have complied with the ITC recapture requirements because these rules are new and are complicated for many organizations to administer. Since employee expense reimbursements typically contain expenses that are subject to the recapture requirements, taxpayers can be sure that auditors will review these calculations for compliance.
Our experience with the QST input tax refund restrictions, which operate in a similar manner and are the blueprint for the recapture requirements, reveals that taxpayers often do not comply with these restrictions properly. Federal auditors are likely aware of this fact and will aggressively audit these requirements, expecting that many taxpayers will make mistakes when attempting to comply with these new rules.
Employee Expense Reimbursements – Practical Strategies for Compliance

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