Allowances
GST registrants that pay allowances to cover employees' expenses can claim an input tax credit (ITC) in the following situations:
- At least 90% of the expenses are taxable (zero-rated expenses are not included).
- The expenses are reasonable and were incurred in Canada in the course of the registrant's activities.
- The allowance is deductible (in whole or in part) in the calculation of the registrant's income for income tax purposes.
Employers can claim an ITC to recover the GST paid on expenses that they could have recovered as an ITC had they incurred the expenses themselves. In this case, the ITC is equal to 5/105 of the allowance paid, taking into account the restrictions on meal and entertainment expenses.
Likewise, QST registrants can claim an input tax refund (ITR) equal to 9.975/109.975 of the allowance paid to an employee for expenses incurred in Québec on which QST was paid, provided the allowance is deductible (in whole or in part) in the calculation of the registrants' income for income tax purposes. Employers can claim an ITR to recover the QST paid on expenses that would have given entitlement to an ITR had the expenses been incurred directly by the employer.
Large businesses cannot claim ITRs for allowances paid before January 1, 2018, for expenses covered by the ITR restrictions. With the phasing out of those restrictions, large businesses can claim partial ITRs (25% in 2018, 50% in 2019, 75% in 2020 and 100% from 2021 onward) for allowances paid after December 31, 2017.
The same rules apply to allowances paid to members of a partnership and volunteers of a charity or public institution.
Large businesses could not claim ITRs on allowances paid before January 1, 2018, for expenses subject to ITR restrictions. With the phasing out of those restrictions, large businesses have been able to claim partial ITRs for allowances paid after December 31, 2017.
To learn more, click ITR Restrictions for Large Businesses.
| Examples of allowance categories | Large businesses | Small and medium-sized businesses |
|---|---|---|
| Meals |
ITC = 5/105 of the allowance, subject to the applicable restrictions Partial ITR (restriction for large businesses) |
ITC = 5/105 of the allowance, subject to the applicable restrictions ITR = 9.975/109.975 of the allowance, subject to the applicable restrictions |
| Kilometres travelled |
ITC = 5/105 of the allowance Partial ITR (restriction for large businesses) |
ITC = 5/105 of the allowance ITR = 9.975/109.975 of the allowance |
| Lodging |
ITC = 5/105 of the allowance ITR = 9.975/109.975 of the allowance |
ITC = 5/105 of the allowance ITR = 9.975/109.975 of the allowance |
| Transportation (train, bus or airplane) |
ITC = 5/105 of the allowance ITR = 9.975/109.975 of the allowance |
ITC = 5/105 of the allowance ITR = 9.975/109.975 of the allowance |
For the tax fractions applicable to allowances paid for expenses incurred in a participating province, refer to GST/HST memorandum 9.3, Allowances, published by the Canada Revenue Agency and available on the Government of Canada website.