When I read the article in the Vancouver Sun entitled "Entrepreneur says HST cuts red tape", all I could think is this guy is going to be audited by the Canada Revenue Agency (CRA). Here is a guy trying to help the B.C. Liberal Government win the HST referendum and is putting out his story for the world (and the CRA) to see. However, either he does not understand the HST rules regarding meals and entertainment expenses or the reporter does not understand the rules. What has been written might catch the attention of the CRA.
The Vancouver Sun article states:
- Taneja footed a $429.42 bill for a birthday party of 20 at the Waldorf, then headed with a staff member to meet some friends at 100 Nights, where he spent a further $358.40 on food and booze;
- But HST costs Taneja incurs to do business get refunded, and he supports the harmonized tax as a better alternative to the PST/GST hybrid. Before, businesses could recover the five-per-cent GST, but not the seven percent PST component.
The reality is that any registrant for HST purposes cannot recover 100% of the HST paid on meals and entertainment expenses. At best, the registrant is limited to an input tax credit (ITC) of 50% of the HST paid on meals and entertainment expenses. Large businesses (businesses that make taxable supplies in excess of 10,000,000 per year, certain financial institutions and certain MUSH sector businesses) may be subject to the recaptured input tax credit rules and these businesses must reverse their ITCs on the provincial component of the HST charged in connection with their meals & entertainment expenses.
For example, if a small business, such as the individual in the Vancouver Sun article, has a meal expense of $200 (including tip) in British Columbia, they would pay HST in the amount of $24. The allowable input tax credit would be only $12 (not the full $24).
Now for the reality check - Under the British Columbia PST regime, a person did not pay social services tax on restaurant meals (food component) and paid SST on alcohol. Assuming the restaurant meal did not include alcohol, prior to HST, the individual would pay $200 plus $10 GST. The individual would recover $5 by way of an input tax credit. As a result of HST, the unrecoverable cost of the restaurant meal increased from $205 to $212 (costs $7 more).
The CRA may audit ITC claims to ensure that a registrant indeed paid the HST in connection with commercial activities and that he/she has the documents required that meet the documentary requirements. The individual in the article is said to have met "friends at 100 Nights". If a registered person goes out to dinner with friends, family or for personal reasons, he/she is not entitled to claim ITCs in connection with the personal expenditures. The CRA will be concerned that under the HST regime, sole proprietorships and other registrant may be using their GST/HST returns improperly as a personal ATM to government money. It was never intended that individuals recover personal costs.
In the circumstances of the person in the Vancouver Sun article, the CRA will go through the receipts (and there better be receipts) with a fine tooth comb and will want information about the many meals and entertainment expense claims, including who was the business client at each of the restaurant/bar. The CRA auditor may ask for the names and contact information of the business associates and will follow-up with the business associates to see if they met for business purposes. The threat of an audit or quasi-criminal charges for lying to an auditor often cause the business associates to convey accurate information about the meetings over meals & entertainment. Also, business clients do not like the attention of the CRA and contact by the CRA may negatively affect a business relationship (I have seen this happen before when an individual writes a person's name on an expense claim and the meeting did not actually occur).
I would like to warn those registrants who are not familiar with the HST rules and who do not have an accountant/bookkeeper who knows the HST rules. Following the actions of the person in the article may get you into trouble with the CRA.
As for the Vancouver Sun article, the next article may have a different title: "HST Audit Increases Red Tape".
Cyndee Todgham Cherniak is the founding lawyer of LexSage, a boutique international trade law and sales tax firm in Toronto,
