Reimbursements

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Employers, partnerships, charities and public institutions that are registrants and that reimburse expenses incurred by an employee, partner or volunteer are entitled to an input tax credit (ITC) and an input tax refund (ITR) equal to the GST and QST paid on the expenses.

They can choose either of the methods described below to determine the ITC and ITR to which they are entitled with respect to a reimbursement of expenses incurred in Canada (for GST purposes) or in Québec (for QST purposes).

The chosen method for each expense category (transportation or lodging, for example) must be applied consistently for the entire fiscal year. In most cases, registrants must also take into account the restrictions on meal and entertainment expenses.

Large businesses must take the ITR restrictions into account until December 31, 2017. With the phasing out of the restrictions, they can claim ITRs for expenses reimbursed to employees on or after January 1, 2018, at the following rates: 25% for 2018, 50% for 2019, 75% for 2020 and 100% for 2021 onward.

Registrants that opt for the second method below must have the documents and information necessary to claim the ITC or ITR. For those that opt for the first method below, the requirements for documents and information are less strict; however, they must keep adequate registers and books of account and retain certain information on each reimbursement to employees, partners or volunteers.

Either of the methods of calculation described on the Meal and Entertainment Expenses page can be used to calculate ITCs and ITRs for meals and entertainment.

First method

Registrants can claim an ITC equal to 4/104 of the total amount reimbursed and an ITR equal to 9/109 of that amount. This method, referred to as the “factor method,” can be used if at least 90% of the expenses reimbursed were taxable (excluding zero-rated expenses) and the expenses were incurred in Canada (or in Québec, for QST purposes).

Second method

Registrants can calculate the actual amount of GST and QST paid on expenses that they reimbursed and that were incurred in Canada (or in Québec, for QST purposes) during the reporting period in question. Under this method, the GST or QST paid by the employee, partner or volunteer is multiplied by the lesser of the following amounts:

  • the percentage of the cost that is reimbursed (that is, the reimbursement divided by the cost);
  • the proportion in which the good or service is used in the commercial activities.
Example using the second method

Daniel incurs expenses of $574.88 exclusively in the course of his commercial activities ($500 plus $25 GST and $49.88 QST). His employer reimburses him for the expenses.

The employer can claim an ITC equal to the lesser of the following amounts: $ 25 × $ 574.88$ 574.88= $ 25or $ 25 × 100  % = $ 25
The employer can therefore claim an ITC of $25.
The employer can also claim an ITR equal to the lesser of the following amounts: $ 49.88 × $ 574.88$ 574.88= $ 49.88or $ 49.88 × 100  % = $ 49.88
The employer can therefore claim an ITR of $49.88.

ITCs and ITRs for expense reimbursements

ITCs and ITRs for expense reimbursements for large businesses
Examples of expense categories Actual amount of QST and GST paid Factor method
Meals

ITC = GST paid, subject to the applicable restrictions

No ITR (restriction for large businesses)

ITC = 4/104 of the reimbursement, subject to the applicable restrictions

No ITR (restriction for large businesses)

Lodging

ITC = GST paid

ITR = QST paid

ITC = 4/104 of the reimbursement

ITR = 9/109 of the reimbursement

Transportation (train, bus or airplane)

ITC = GST paid

ITR = QST paid

ITC = 4/104 of the reimbursement

ITR = 9/109 of the reimbursement

Automobile rental

ITC = GST paid

No ITR (restriction for large businesses)

ITC = 4/104 of the reimbursement

No ITR (restriction for large businesses)

ITCs and ITRs for expense reimbursements for small and medium-sized businesses
Examples of expense categories Actual amount of QST and GST paid Factor method
Meals

ITC = GST paid, subject to the applicable restrictions

ITR = QST paid, subject to the applicable restrictions

ITC = 4/104 of the reimbursement, subject to the applicable restrictions

ITR = 9/109 of the reimbursement, subject to the applicable restrictions

Lodging

ITC = GST paid

ITR = QST paid

ITC = 4/104 of the reimbursement

ITR = 9/109 of the reimbursement

Transportation (train, bus or airplane)

ITC = GST paid

ITR = QST paid

ITC = 4/104 of the reimbursement

ITR = 9/109 of the reimbursement

Automobile rental

ITC = GST paid

ITR = QST paid

ITC = 4/104 of the reimbursement

ITR = 9/109 of the reimbursement

To find out which factor method rates apply if all or substantially all expenses were incurred in a participating province, refer to GST/HST memorandum 9.4, Reimbursements, on the Government of Canada website.

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