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Quebec — Phase-Out of ITR Restrictions Continues in 2019

Quebec Phase-Out of ITR Restrictions Continues in 2019

Second stage of Quebec's phase-out of the input tax refund restrictions to start in the new year

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Large businesses must prepare their systems for the second stage of Quebec's phase-out of the input tax refund (ITR) restrictions on January 1, 2019. As a result of this upcoming change, certain large businesses will be able to claim 50% of the Quebec sales tax (QST) that becomes payable on goods and services subject to the ITR restrictions as of January 1, 2019 (up from 25%). In general, these ITR restrictions are expected to be fully phased out as of January 1, 2021.

To prepare for this second stage of the phase-out of ITR restrictions under the QST, affected businesses may need to adjust certain accounts in their systems and calculations that are related to the property and services subject to the ITR restrictions, including accounts related to purchases and leases of certain vehicles, common area maintenance charges and employee expense accounts. In addition, large businesses that qualify to claim ITRs will have to carefully review when the tax became payable in order to determine if they can claim an ITR of 25% or 50% of the QST payable. These businesses should also review their systems to ensure that all the required changes were made for the first phase-out period and they haven't missed any related ITRs over the last year.

Quebec's phase-out of its ITR restrictions follows similar tax changes in Ontario and Prince Edward Island. Ontario completed the phase-out of its recaptured input tax credit (RITC) rules on July 1, 2018, while Prince Edward Island began to phase out its HST RITC rules on April 1, 2018 and will continue to the second phase-out stage on April 1, 2019. Large businesses will also need to prepare their systems for these changes to the HST RITC rules in Prince Edward Island.

Background
Currently, a "large business" that qualifies to claim ITRs and that incurs QST on a property or a service subject to the ITR restrictions can claim only 25% of related ITRs for such QST. In general, a large business is defined as a business with more than $10 million in annual revenues, including revenues from associated entities, as well as most financial institutions. Special rules apply for reorganization transactions and new businesses.

Property and services subject to the ITR restrictions includes:

  • Electricity, gas, combustible or steam, unless used in production of goods intended for sale
  • Telecommunications, except for internet access services and toll-free numbers (e.g., "1-800" and "1-888" numbers)
  • Meals and entertainment expenses subject to the 50% deductibility restrictions for income tax purposes
  • Road vehicles under 3,000 kilograms that must be registered to travel on public roads
  • Fuel used in such road vehicles, other than diesel fuel.

The phase out of the ITR restrictions, which is scheduled over three years, will continue to increase the ITR claim rate as follows:

  • January 1, 2019 to December 31, 2019 - 50% claim rate
  • January 1, 2020 to December 31, 2020 - 75% claim rate
  • January 1, 2021 and beyond - 100% claim rate.

Get ready for second phase-out period
In addition to adjusting their systems for the second stage of the phase-out period starting January 1, 2019, large businesses should also remember that other types of transactions may also be affected by these phase-out periods, such as trade-ins of used vehicles and QST remittances related to employee taxable benefits. Quebec previously released guidance on how the phase out of the ITR restrictions may affect various transactions involving goods and services subject to the ITR restrictions, including transactions related to:

  • Acquisitions, sales, leases, trade-ins of road vehicles
  • Road vehicles used by automobile dealers
  • Goods brought into Quebec
  • Telecommunication services
  • Transfer of property of a business and elections made by members of a closely related group
  • Joint ventures
  • Employees' allowances and taxable benefits
  • Meals and entertainment expenses.

For more information, contact your KPMG adviser.

Information is current to November 13, 2018. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500
 

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