In the management of recoverable GST-HST-QST on reimbursement of employees’ expenses as well as reimbursement from members of the board and volunteers, a fundamental question that organizations have to address is whether to choose the exact method or the factors method.
When the GST was introduced, an argument in support of the use of the factors method on employee expenses, is to the effect that documentary requirement to claim ITC’s was less strict. Is it really the case?
Indeed, although on one hand, the CRA has pretty much written that one of the objective of the factors method is to minimize the documentary requirement, on the other hand the Agency published the guide RC4409 entitled «Keeping Records» listing the common documentary requirements for both income tax purposes and sales tax purposes. In that respect the Agency stance in the auditor’s guide on travel expenses is that hotel, bus, train, air fare as well as meal taxi, tips must be supported with bills. At the end of the day, organizations have to keep invoices in support of expenses reimbursed to employees.
A situation that is encountered regularly are expenses reimbursed to employees where employees used their credit cards (ex. VISA, MC, AMEX) and submitted the monthly credit card statement as a supporting document. Even if the organization selected the factors method, this kind of monthly credit card statement is not a proper documentary requirement. On several occasion tax authorities have written that receipts are the proper document. In fact section 35 of the GST-HST Memorandum 9.4 entitled «Reimbursement» under the factors method rules, states that « the monthly credit card statement does not constitute evidence to claim ITC»
Another major issue when embracing the factors method is that it can only be used, if and only if, 90% of expenses in a given expense report are taxable other than zero rated. If the intent with the introduction of the factors method was to promote simplicity, in practicality to calculate for each expense report whether the factors method can actually be used represent an enormous task. In a nutshell, organizations would need more or less to use the exact method in order to determine if an expense report qualifies to claim input tax under the factors method due to 90% test. With the current economic environment where numerous employees incurred non taxable purchases from foreign suppliers, or encountered expenses in multiple jurisdictions, it is very common that the 90% test is not fulfilled for several expense reports.
Finally, the factors method is purely an administrative method. It`s not the law. In case of litigation relating to the understanding and the administration of the factors method, it’s the audit department of the CRA and the ARQ who settle the litigation. So, registrants who have selected the factors method should be aware that they have fewer rights.
It is important to note that the rules dealing with the documentary requirements under the exact method for reimbursement of expenses to employees are the one dealing with the deemed tax paid. Indeed, for the rules dealing with GST-HST & the QST on employee reimbursement we have to understand that there are 2 transactions. First, the employee acquires a good or a service (ex. purchase of a laptop at the Apple Store for 1,500$) that he will use exclusively in the course of commercial activities of his employers. At this step the employee has no documentary requirement to fulfill, it is his own purchase; he doesn’t personally claim ITCs. In a second step, he will submit an invoice as a reimbursement to his employer. When the employee will obtain a reimbursement from his employer at that time the employer, under section 175 of the Excise tax act will be deemed to have paid tax on the laptop.
The GST/HST & QST documentary requirements are different if the employer had directly purchased the laptop from the Apple Store. In this last case, for purpose of claiming taxes, the company name should appear on the invoices issued by the Apple Store. It is not the case, when an employee buys the laptop and subsequently obtain a refund through an expense report as explained before.
If there is disagreement between the registrant and tax authorities when it comes to the application of the exact method, since it’s a method supported by detailed provisions of the Excise Tax Act and an Act respecting the Quebec Sales Tax, registrants can bring forward their arguments to tax authorities and if necessary they can bring them to court.
At a time when there was one GST rate and no HST, no QST, no online purchases, the factors method made a lot of sense, but today, considering the GST, the 13% HST, the 15% HST, the QST, transaction in several jurisdictions, online purchases with no tax from foreign vendors, the use of the factors methods is becoming more difficult than ever. Since taxes to claim on purchases are more substantial than ever a bad management of these taxes to claim represent a direct cost for organizations.
Furthermore, the software Advataxes, allow you to easily claim taxes on every single purchase. Even in the case of meals with tip, Advataxes can precisely identify, with ease, the recoverable tax amount (see video here), while the tax code approach shows its limitation for such a major travel expense, that is meal expenses. As long as an organization is entitled to claim taxes on a given purchase, it just has to claim taxes on that purchase. If several purchases do not give rise to an input tax, simply not claiming taxes on these is the solution and it can be done easily.