1 ISSUE THE TAX FACTOR DO YOU HAVE ALL THE DOCUMENTS REQUIRED TO SUPPORT YOUR RECOVERY OF GST/HST AND QST? CONTENTS Do you have all the documents required to support your recovery of GST/HST and QST? Q&A: Answering your tax questions, Principal residence exemption Businesses that carry on commercial activities and are registered for GST/HST and QST are entitled to recover GST/HST and QST paid on their expenses. The recovery of this type of tax is referred to as an Input Tax Credit (ITC) in the case of GST/HST and an Input Tax Refund (ITR) in the case of QST. There are specific documentary requirements that must be met in order to be entitled to recover the sales taxes paid and some businesses may not be aware of these requirements. More often than not, ITCs and ITRs are disallowed because businesses have not met the documentary requirements outlined by the federal and Québec governments. This article will review these requirements and provide guidance for you to ensure that your business is in a position to recover ITCs and ITRs. What does documentary evidence include? Legislation provides that before a registrant can claim an ITC or ITR, the registrant must first obtain the proper documentary evidence to support a claim. As well, before filing the return for the reporting period in which the ITC or ITR is to be claimed, the registrant is required to obtain sufficient evidence as detailed under the Input Tax Credit Information (GST/HST) Regulations and the equivalent Québec regulations. You should note that supporting documentation includes, but is not limited to: an invoice; a receipt; a credit card receipt; a debit note; a book or ledger of account; a written contract or agreement; any record contained in a computerized or electronic retrieval or data storage system; and any other document validly issued or signed by a registrant in respect of a supply made by the registrant on which the sales tax is paid or payable.
2 2 In addition to the supporting documentation regulations, there is a requirement that certain information be provided. Keep in mind that the details of the required information depend on the dollar value of the expense in question. Having said that, there is no requirement that the information needed to support an ITC or ITR claim be contained in a single document. The following table helps summarize the required information that should be detailed on supporting documentation. Summary of required information detailed on supporting documentation Amount under $30 Amount is $30 or more and less than $150 Amount is $150 or more Name of vendor Date of invoice (where one is issued) Date tax was payable (where no invoice is issued) The total amount paid for the supply The GST/HST and QST registration number (if applicable) of the vendor The amount of the tax or a statement that the tax is included in the price n/a For QST only: The purchaser s name n/a n/a The terms of payment n/a n/a A description of each supply sufficient to identify it For QST only: For QST only: Some additional matters to consider with respect to documentary evidence What needs to be included on an invoice? When preparing your GST/HST and QST refund claim, it is important to remember that an invoice includes a statement of account, a bill, a cash register slip or receipt and any other similar record regardless of its form. Having noted that, where a vendor uses a billing agent to make a supply on its behalf, it is acceptable for the billing agent s name and registration number to be used on the invoice in place of the actual vendor s name and registration number. In cases where a vendor uses a registered trade name in its business and on its invoices, it is acceptable for the invoice to provide only the trade name and registration number. Keep in mind, however, that trade names should be registered with the applicable government registry in order to satisfy the documentary requirements. Contact your BDO advisor if you receive such an invoice. For invoices with amounts equal to or in excess of $150, it is extremely important that the purchaser s name be on the supporting documentation. If, for example, an invoice is made out to Company A but it in fact relates to the activities of Company B, Company B cannot claim the ITC or ITR. In this case, the invoice would have to be cancelled and re-issued to Company B. Alternatively, Company A (the purchaser who is legally liable to pay for the invoice) can claim the ITC or ITR and then re-invoice Company B for the supply adding GST/HST and QST as applicable. In this example, Company A would have to
3 3 include all the documentary evidence to enable Company B to reclaim the taxes. What if the invoice includes false information? It is important to note that where a vendor has supplied a false or incorrect GST/HST or QST registration number, the purchaser is not permitted to claim an ITC or ITR. What if there are multiple claimants for a single supply? Bear in mind that where there are multiple claimants for a single supply, each entity must be identified on the supporting documentation. In this case, each of the purchasers would only be entitled to claim an ITC or ITR in respect of the proportionate amount of tax paid to the extent it is used in their business. The proportionate amount would typically be laid out in an agreement between the sharing parties. What if an agent is invoiced for a supply? It is fairly common for an agent or representative to be invoiced for a supply that belongs to the beneficial owner or principal. In these circumstances, it is the beneficial owner or principal that has the right to claim the ITC or ITR. However, in order to support the claim, it is strongly recommended to have a written agency agreement or representative clause within a contract confirming this type of relationship. Are there special rules where a credit card is used to pay an invoice? Credit card expenses are regularly the subject of an audit of ITCs and ITRs. Very often businesses do not have the credit card slips or an actual invoice or bill. The rules are quite strict on credit card expenses as the Canada Revenue Agency maintains that a credit card statement does NOT constitute acceptable documentary evidence. This means that whether a registered business uses a simplified factor approach to calculate the ITC or the actual tax paid, the credit card statement must be supported by another document. In addition, where a credit card slip is issued in conjunction with another slip or invoice, both components must be obtained in order to claim the ITC or ITR. Only in cases where only the credit card slip is issued (such as supplies in the hospitality industry or by gasoline service stations) will the credit card slip itself be considered acceptable documentary evidence. What does this all mean? The claiming of ITCs and ITRs is an integral component of a value added tax system. In order to recover these sales taxes, one must obtain and keep on file the acceptable documentary evidence. Where the sales tax becomes embedded in the cost of goods sold or services rendered, the economics of such a system break down. Even though the GST/HST and QST regimes have been around for over 20 years, the government authorities are taking a very hard line approach. If your business does not have the appropriate documents on hand, and does not provide all of the required information, ITCs and ITRs may be disallowed. To ensure that your business is ready when the auditor comes knocking, it is always a good idea to review your internal policies regarding the claiming of ITCs and ITRs with your BDO advisor.
4 THE TAX FACTOR 4 Q&A: ANSWERING YOUR TAX QUESTIONS Principal residence exemption Ken and Ivy purchased their home in rural British Columbia three decades ago just before starting a family together. At the time they purchased their home, zoning laws applicable to the area prevented them from acquiring property that was less than 2.75 hectares. Given Ken and Ivy s dream of raising their children in the country, this constraint did not present a problem and they purchased a house on 2.75 hectares of property. As Ken and Ivy approach retirement, they are contemplating selling their home and property. They plan to purchase a condominium unit in the city to be closer to their adult children and their families. Ken and Ivy are confident that their property has appreciated in value. They are hoping that the capital gain arising from the disposition will not be subject to income tax because of the principal residence exemption. Ken and Ivy s question Ken and Ivy have asked us, their trusted BDO advisors, Will the gain from the sale of our home and rural property be subject to income tax? BDO s answer The principal residence exemption In simple terms, the principal residence exemption (PRE) is a special exemption that will reduce or eliminate the capital gain realized upon the disposition of a property which constitutes a principal residence, thereby reducing income tax. In this regard, a principal residence is generally any residential property (such as a house) owned by an individual and occupied by that individual or their spouse or common-law partner, or former spouse or common-law partner, or child at any time in the year. Note that the individual may own the property jointly with another person. Of interest to Ken and Ivy, a principal residence includes up to ½ hectare (approx. 1.2 acres) of land surrounding a house, to the extent that the land contributes to the use and enjoyment of the principal residence. In cases where the surrounding land exceeds ½ hectare, the entire capital gain may also be exempt from income tax by using the PRE if the taxpayer can establish that the excess land is necessary for the use and enjoyment of the house. It is worth noting that the Canada Revenue Agency (CRA) maintains that to be considered part of the principal residence, the excess land must clearly be necessary for the housing unit to properly fulfill its function as a residence and not simply be desirable. Furthermore, they state that factors such as a minimum lot size or a severance or subdivision restriction may be relevant in determining whether land in excess of ½ hectare is necessary for the use and enjoyment of a house. This means that Ken and Ivy must establish that the excess land of 2.25 hectares (2.75 hectares less ½ hectare) is necessary for the use and enjoyment of their house in order for the excess land to be considered to be part of their principal residence. Case law for Ken and Ivy to consider Ken and Ivy should note that there have been numerous cases that focus on the issue of whether excess land surrounding a house qualifies for the PRE. In one such case, Carlile v. the Queen (95 DTC 5483, FCA), the federal court heard from a taxpayer who sold a acre parcel of land. The taxpayer, in this case, used only 3 acres personally while the balance of the property was rented to a farmer. The land in question was zoned for agricultural use and by-laws required a minimum lot size for both farming and residential use. In this case, the federal court held that because it was difficult for the taxpayer to obtain consent to have the land in question subdivided, the entire property qualified for the PRE.
5 5 In a more recent case, Wayne Cassidy v. the Queen (2011 FCA 271), the federal court considered whether a taxpayer that sold his home with 2.43 hectares of land was eligible for the PRE. In this case, the CRA had denied the PRE on the property that exceeded ½ hectare since, just prior to the sale, the land was rezoned allowing it to be subdivided. When the property was acquired, the taxpayer could not have purchased less than 2.43 hectares of land because of zoning laws. In reaching their decision, the federal court maintained that eligibility for the PRE is to be determined annually and the rezoning of the taxpayer s property just before a sale did not affect the taxpayer s eligibility for previous years. What does this mean for Ken and Ivy? It is important for Ken and Ivy to determine whether or not the zoning laws have changed since they purchased their house located on 2.75 hectares of property. To the extent that the zoning laws have changed during their ownership and the property can be subdivided, the determination of whether the excess land will be considered part of their principal residence will be made on a year-by-year basis. To the extent that zoning laws have not changed during their ownership, based on the case law noted above, the entire 2.75 hectares of property should be considered part of their principal residence throughout the time that they have owned the house and property. Additional matters to consider Ken and Ivy must remember that they are only able to designate their home as their principal residence for each year that they, or their minor children, ordinarily inhabited the property. As well, if Ken and Ivy own(ed) more than one residence for years after 1981, they can only designate one residence for a given year as their principal residence. For more details on the PRE and these rules, read our article Tax implications of owning personal real estate: Selling a home in the issue of the Tax Factor. Note that the discussion above assumes that Ken and Ivy did not use the excess land in a farming business. There are special rules that apply when a farm property that includes a house is sold. Contact your BDO advisor if you are selling a farm property that includes a house. Summary The decision to sell a home often comes following careful consideration based on a number of factors. With a solid understanding of the tax consequence of selling their home, this decision may be a little easier for Ken and Ivy. If you are selling a property and are uncertain if you can claim the PRE, contact your BDO advisor. The information in this publication is current as of October 1, This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.