Allowances

GST registrants that pay allowances to cover employees' expenses can claim an input tax credit (ITC) if:

  • 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 in accordance with the Income Tax Act.

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 pursuant to the Taxation Act. Employers can claim an ITR for an allowance paid to an employee as though they had incurred the expenses covered by the allowance directly in the course of their commercial activities.

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.

Note

The same rules apply in the case of allowances paid to members of a partnership and volunteers of a charity or public institution.

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