Likely Areas for Finding Missed Input Tax Credits (Free Money)!
As a follow-up to my recent post on how to properly manage a CRA audit, I am pleased to provide the following list of areas where I regularly find clients have failed to fully recover the GST/HST. If you are still interested in reading my Audit Playbook – it can be found at that bottom of this page. For now however, I would like to provide some concise information about areas where many taxpayers fail to properly maximize the recovery of GST/HST.
In general – most organizations involved in ‘commercial activities’ as defined in the Excise Tax Act are entitled to recover the GST/HST they have paid – by claiming input tax credits (‘ITCs’) on a GST/HST return filed by them. Below are some of the areas where I find my clients have routinely missed claiming ITCs. I hope you find it useful.
Area #1 Employee Reimbursements and Allowances
Generally, employers can claim ITCs for the GST/HST included in reimbursements paid to employees so long as the expenses are incurred in Canada and are incurred on the employer’s behalf for its commercial activities.
Further, employers are considered to have paid GST/HST on reasonable allowances paid to employees so long as the following are true:
- the allowance is used to pay GST/HST taxable (other than zero-rated) expenses and at least 90% of the expenses are incurred in Canada, or the allowance is for the use of a motor vehicle in Canada;
- the allowance is or would be deductible for income tax purposes; and
- the expense incurred by the employee, would have been eligible for ITC had it been incurred directly by the employer.
Area #2 Goods Imported into Canada
Purchases made outside of Canada are generally not subject to GST/HST. Commercial imports are however subject to GST at the time of importation. The tax is collected by the Canada Border Services Agency. Since there is no GST/HST on the face of the invoice, some businesses fail to appreciate ITCs can be claimed for the tax paid at the border.
Area #3 ‘Recaptured’ ITCs
The ITCs available with respect to the HST paid on certain expenses in Ontario and Prince Edward Island were effectively reduced through a mechanism known as the recapture of ITCs. The recapture of ITCs was intended to be a short term program. The recapture program has been fully eliminated in Ontario and will be fully phased out in PEI on March 31, 2021. It is important to ensure that the recapture process has been monitored and updated to maximize ITC claims in those two provinces.
Area #4 Automatic Payments
Recurring expenses are often setup for automatic payment. As these expenses (such as commercial rents) are not handled through the ‘normal’ accounts payable process – if the initial ‘setup’ of the payment is not handled properly – there can be repeatedly missed ITC claims. This problem may continue to go unnoticed as further automated payments are made.
Area #5 ‘Messy’ or ‘Complicated’ Invoicing
Although most invoices are straightforward and clearly identify the amount of GST/HST paid, this is not always the case. Some invoices can be many pages long, and may include GST/HST on separate lines. It is important to have accounts payable staff thoroughly review invoices to ensure they are identifying and properly coding all GST/HST found within an invoice.
It is an unfortunate reality that many businesses are leaving money on the table by not claiming the full amount of ITCs to which they are entitled. I have tried to provide some practical examples of where you can look within your accounts payable to find opportunities to recover additional GST/HST. If you are not comfortable reviewing your historical records to identify recovery opportunities, don’t hesitate to reach out – I am more than happy to assist you with this exercise.
As a final comment the lawyer in me can’t help but to note that the content on this web site is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any specific legal issues. I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website. Finally, accessing the information on my website does not create a lawyer-client relationship.
September 23, 2020
My First Blogpost:
My Canada Revenue Agency (‘CRA’) Audit Playbook
Welcome to my first blog post. I can’t say I ever expected to host a ‘tax blog’ but given my recent LinkedIn experience I thought I would give it a shot. I hope you find it useful and it leads to many more future posts.
Prior to August 2020 anything I posted to LinkedIn may have, on a good day, garnered 300 – 500 views. In August, I worked to increase my connections and I set a goal of providing valuable content free of charge, with the hope that someone would find the information of value. As of the time of writing this Blog Entry – over 1700 people have viewed my latest LinkedIn Post!
Building on this momentum I have decided to share more content with you. Given that the CRA has recently announced that targeted CERB / CEWS audits will start this summer, with a broader audit mandate in the fall, I have decided to share my CRA Audit Playbook with all of you. This is a simple guide intended to help you manage a CRA audit. The information below is being provided in light of the pending CERB/CEWS audits, but it is equally relevant to any other audits conducted by the CRA (GST/HST, Excise Tax, Income Tax) or any other tax authority for that matter.
Here are the 6 Steps that I think are fundamental to properly managing your CRA audit.
Step #1 – Authorize a Particular Individual to Lead the Audit.
Most people don’t enjoy the thought of managing a tax audit but someone needs to be responsible to play the lead role for the audit. Ensure you pick someone that can handle it. Make sure they are aware they own the project and you are counting on them to do a good job. Finally, and a point that is often missed – ensure the rest of your staff are informed that they are not authorized to speak to the auditor. While this might seem harsh – the point is to ensure a consistent single message is delivered on behalf of your organization – you don’t need employees making inaccurate or ill-informed comments to the CRA.
Step #2 – Always Respond in a Timely Manner
Attempting to ‘slow play’ an auditor does not typically work well. The longer an audit takes to complete, the higher the expectation that the auditor must ‘find something’ to re-assess. Instead of slow playing the audit, aAsk auditors to put any requests in writing (including any follow-up requests for information). Should you feel there is a deadline that can not be met, raise this issue with the auditor as early in the process as possible, request an extension of the deadline and highlight any reasons to justify the request.
Step #3 – Respond in Writing
In step #2 you asked to auditor to provide any requests in writing. It is equally important that you provide your answers in writing as well. This should hopefully minimize any confusion about what answers you have (or have not) provided and should ensure there is no confusion about what was meant. Written responses can be provided to the auditor via fax, or can be uploaded to the auditor through the CRA’s online portal.
Step #4 – Ensure All Queries are Clearly Answered
Don’t assume that the auditor is well versed in how your business operates, or the standard practices of your industry. You may need to use plain language to describe aspects of your operations so the auditor can understand your business. Also – review all information and/or working papers you are providing to ensure that you are providing clear answers. What may be apparent to your accounting team may not make sense to the auditor. Be cautious in providing information that was not specifically requested.
Step #5 – Do everything within your power to resolve matters at the audit stage.
I can’t stress this point enough. Often taxpayers grow frustrated with the audit process, and give up during the audit, assuming that they (or their accountants or lawyers) can make further representations once the auditor has completed the audit. While there are formal processes for Objecting to Audit findings – often these proceedings are time consuming and expensive. Put as much effort as humanly possible into resolving the issues during the audit with the auditor, its always better to resolve the matter at this level where possible.
Step #6 – Don’t be afraid to request a discussion with an Auditors Lead, or to bring in your own outside support.
Many taxpayers don’t realize that you have the ability to speak to the Auditor’s supervisor if you feel that is appropriate. This is particularly useful in situations where you feel the auditor’s properly applying the tax legislation, or conducting themselves in an inappropriate manner. If you still can’t get resolution with the Auditor’s supervisor – it may be time to bring in your own advisors (if you have not done so already).
I hope you find the above to be useful. I have tried to provide some practical advice to help with your audit process – without getting into the weeds of the various technical issues that could arise. If you are not comfortable handling your audit or feel there are issues that may become problematic, don’t hesitate to discuss your situation with a professional as early in the process as possible. Rarely do I hear a taxpayer complain that they engaged me too early, but all too often I hear “ I only wish I had called you sooner”.
And of course the Disclaimer:
As a final comment the lawyer in me can’t help but to note that the content on this web site is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any specific legal issues. I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website. on this web site. Finally, accessing the information on my website does not create a lawyer-client relationship.
September 1, 2020