You May Be Underpaying the Feds

Where tax laws are limiting deductions for items like Food, Beverages and Entertainment to 50% of the actual cost, the GST has also limited the input tax credit allowed to 50%.  But it gets better! !

50% Limitation for Food, Beverages, and Entertainment

For income tax purposes, an amount payable for the rental of a fishing lodge cannot be deducted in computing a taxpayer's income where the main activity is the entertainment or recreation of clients, shareholders, or employees. For GST / HST purposes, a registrant may be entitled to claim an input tax credit (ITC) for such an expense. However, ITCs for food, beverages and entertainment expenses are effectively limited to 50% where the expenses are subject to the 50% limitation for income tax purposes.

In the case of the rental of the fishing lodge, the amount payable is deemed to be 50% of the amount actually payable for income tax purposes. However, the amount may not be deducted in computing the taxpayer's income. Although an ITC may be claimed for the rental of the fishing lodge provided that all the conditions for claiming an ITC are met, the ITC is still subject to the 50% limitation for food, beverages, and entertainment expenses.

This position applies equally to other food, beverages, and entertainment expenses where a deduction is denied for income tax purposes and the provision is not mirrored for GST/HST purposes to deny an ITC. For example, where an income tax deduction is not available for a third convention held within a year, ITCs may be claimed for expenses relating to that convention, but they are subject to the 50% limitation where an income tax deduction is not possible.

Allowances Paid to Employees, Partners, or Volunteers for the Use of a Motor Vehicle

Starting January 1, 2001, where an allowance paid by an employer is a combination of a flat-rate and a reasonable per-kilometre rate that covers the same use for the vehicle, the total combined allowance must be included in the employee's income for income tax purposes. In these cases, the allowance is deemed not to be reasonable.

For GST/HST purposes, a person cannot claim an input tax credit (ITC) or rebate in respect of a motor vehicle allowance where the allowance is not reasonable for income tax purposes. Therefore, as a result of the above change, a person cannot claim an ITC or a rebate for such combined allowances paid to their employees, paid to partners where the person is a partnership, or paid to volunteers where the person is a charity or public institution as of January 1, 2001. In these cases, an employee or partner may be able to deduct certain motor vehicle expenses for income tax purposes and therefore, may be entitled to claim the rebate by using Form GST370, Employee and Partner GST/HST Rebate Application