Nearly every small business owner uses personal or corporate credit cards for many of their smaller and non-routine expenses. You may have employees that incur expenses on the company’s behalf using their own personal credit cards and then submit expense reports to the company for reimbursement. This process can be burdensome because there is a lot of paperwork that goes along with this purchasing process, but it doesn’t have to always be this way. If your business qualifies, you may be able to greatly reduce this paperwork and administrative burden, using the Factor Method for claiming GST/HST refunds.

If you don’t keep all the required documentation, the Canada Revenue Agency (“CRA”) could disallow some or all the GST/HST refunds you have claimed. Many small businesses believe it is OK to use company or personal credit card statements to determine and support their GST/HST refunds for day-to-day business purchases using credit cards. This is not sufficient to claim GST/HST paid on business expenses and can get you in hot water with the CRA down the road.

These expenses may relate to smaller charges for the day-to-day business, shareholder or employee travel costs, company vehicles’ fuel, parking, etc. or even certain customer project costs that are charged back to clients’ projects. In addition to the risks noted above in the case of a GST/HST audit, we also see a lot of these expenses being recorded in the accounting and bookkeeping software without GST/HST and so the GST/HST refunds are being missed in many cases, leaving cash tax “on the table”.

So what should you make of all this and how can you fix it?

THE BIG DEAL WITH CREDIT CARDS

For GST/HST purposes, any tax paid by a business that is registered for GST/HST and only earns revenue from taxable supplies of property or services, is generally fully refundable (with some exceptions discussed below) to the company provided that a proper tax invoice is on-hand when the refund is claimed as an input tax credit (“ITC”) in a GST/HST return. Importantly, personal or company credit or debit card statements do NOT constitute valid tax invoices for claiming ITCs (in most situations).

Not to worry, as we may have a solution for you to:

  1. eliminate or greatly reduce the paperwork required to be kept to be eligible to claim ITCs;
  2. eliminate or greatly reduce your risk of a CRA audit reassessment that could disallow some; or all ITCs that don’t constitute valid tax invoices, and;
  3. (c) potentially find you some missing ITCs when GST/HST was not properly recorded in the bookkeeping.

HOW CAN WE SIMPLIFY THIS?

Fortunately, the CRA has discretion to waive some of these requirements in certain situations such as employees, shareholders, officers and charity volunteers (herein “Employees”) for reasonable mileage, travel and “living-out” allowances. They’ll also consider other situations for reimbursements of Employees’ purchases made on behalf of the company for business purposes, including meals and entertainment. The CRA has created written policies that help to simplify the accounting and administrative burden for GST/HST paid on various card expenditures by Employees; however there is a small catch.

THE FACTOR METHOD

Instead of retaining receipts and invoices for employees’ reimbursements of expenses paid on their personal credit cards, CRA allows employers who are registered for GST/HST purposes and eligible to claim ITCs in whole or in part, to claim a factor on all or a portion of such reimbursements. The “factor” depends on whether GST at 5% or HST at 13% or 15% was paid by the Employee. Using this “factor method”, the full amount of the GST/HST is not claimed, but rather a reduced percentage is claimed. The upside: the paperwork is greatly reduced for Employees and the accounting team. In the case of an expense paid by an Employee of $105 (includes $5 GST), the ITC is equal to 4/104 times $105, resulting in $4.04 instead of $5, which becomes the trade-off.

HERE’S AN EXAMPLE:

Assume an employee travels from Vancouver to Calgary for work and pays for the airfare, hotel, taxi, but excluding meals and entertainment to keep it simple. Let’s assume the airfare is $525 return, hotel and meals are $735, taxi to and from Calgary and Vancouver airports is $240 including tips. All these amounts totaling $1,500, include GST and the employer should be able to claim ITCs on most costs incurred by the employee.

The employer will require the employee to provide an expense report and provide copies of the receipts for reimbursement purposes. The employer can choose to claim the full GST of $71.42 included in the $1,500 provided all the information and documentation requirements discussed above are all met. Alternatively, the employer could request only proof of payment (e.g., the credit card slips instead of all the other invoices/receipts) for reimbursed expenses and claim an ITC using the factor method of 4/104 times $1,500 or $57.69, which is a reduction of $13.73; however the reduced paperwork can be worth it. Further the forgone ITC can still be deducted for income tax purposes, further reducing the cash difference.

MUST BE APPLIED CONSISTENTLY

The “factor approach” can be used for different types of expenses but must be used consistently throughout the reporting period where the related ITCs are claimed. For instance, for low dollar value and high frequency expenses such as taxi, meals, parking, etc., the “factor method” could be used to greatly reduce paperwork. Low frequency and higher value credit card expenses such as hotels, airfare, etc. The normal ITC method could be used where the full tax-compliant invoices must be kept, and full ITCs claimed instead of the factor method.

The information that must be obtained and kept for the factor method, is effectively the same information that employers would require of their employees submitting expense reports as follows:

  1. the name and GST/HST registration number of the employer, partnership, charity or public institution that paid the reimbursed amount;
  2. the name of the employee, member or volunteer who received the reimbursement;
  3. the total amount of the reimbursement paid to each employee, partner or volunteer;
  4. the total GST or HST deemed (e.g., 4/104) to have been paid in respect of the reimbursement;
  5. the reporting period in which the reimbursement was paid; and
  6. the nature of the expense (i.e., a description of the expense, its purpose and tax status).

WE CAN HELP

ITC rules are tricky at the best of times, particularly when CRA’s GST/HST auditors tend to “pick on” the issue of non-compliant invoices and deny a claimant their ITCs, but employee reimbursements (and allowances) can be troublesome too for many of the same reasons. While we cannot outline all the different rules here related to ITCs on card expenses, we would be happy to talk with you about your Employee expenses best practices and potentially find your company some cash tax that was missed.

Not so complicated right? At Achen Henderson, we can help you to take the complexity out of sales taxes. We are excited to learn about your firm and how we can help. Call us today for help getting your sales tax collection and reporting right, so that you can rest easy by ensuring your business is not offside with these indirect tax rules across Canada.

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