2021-0898151E5 GST/HST Quick Method of Accounting

Principal Issues: 1. What is the correct treatment under the Income Tax Act for the GST/HST differential under the Quick Method of accounting when GST/HST registrants remit a lower amount of GST/HST without claiming input tax credits on amounts paid. 2. Is the T2125 correct as it pertains to the calculation of government assistance when the Quick Method is used. 3. Are instructions on the T2125 correct for taxpayers who are using the Quick method.

Position: 1. The amount is taxable. 2. The calculation of government assistance on the T2125 when using the Quick method is correct. 3. The note that provides instructions on how to expense amounts when using the Quick Method is misleading and needs to be clarified.

Reasons: The difference between the GST/HST collectible or collected on taxable supplies and the amount of net GST/HST remitted in accordance with the Quick method is deemed to be government assistance by subsection 248(16) and included in income, since this difference is to be retained by the registrant in lieu of claiming ITCs for the GST/HST paid or payable on current expenses and inventory.

Author: D'Angelo, Sandro
Section: 9(1), 12(1)(x),12(2.2), 13(7.1), 18(1)(a), 53(2)(k), 248(16)

XXXXXXXXXX                                                      2021-089815
                                                                              Sandro D’Angelo

November 2, 2021

Dear XXXXXXXXXX,

Re: Taxation of the “Quick Method of Accounting” Under the Income Tax Act

This is in reply to your correspondence of April 2, 2021, which we received from the offices of the Right Honourable Justin Trudeau, Prime Minister of Canada, and the Honourable Mary Ng, Minster of Small Business, Export Promotion and International Trade, where you raised several issues and concerns pertaining to the use of the Quick Method of Accounting for the federal goods and sales tax and the harmonized sales tax paid on purchases (“Quick Method”) and the T2125, Statement of Business or Professional Activities (“T2125”).

While you have raised several issues pertaining to the Quick Method your main issues and concerns can be summarized as follows:

1. You indicate that for taxpayers who are using the Quick Method the T2125 is wrongly taxing as income the federal goods and sales tax and the harmonized sales tax (GST/HST) paid on purchases. That is, it is your view that the T2125 is incorrectly instructing taxpayers who are using the Quick Method to report expenses net of the GST/HST paid on those expenses.

2. It is also your view that the amount that is calculated on lines 3D – 3F of the T2125 is incorrectly described as government assistance.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R11, “Advance Income Tax Rulings and Technical Interpretations.”

Where a taxpayer makes a claim for an Input Tax Credit (“ITC”) or a rebate under the Excise Tax Act with respect to GST/HST paid in respect of a property or service, the amount claimed is deemed to be assistance from a government pursuant to subsection 248(16) of the Act. The CRA’s general position on the taxable status of government assistance is outlined in Interpretation Bulletin IT-273R2, “Government Assistance - General Comments” (“IT-273R2). Paragraph 22 of IT-273R2 discusses the treatment of ITCs for income tax purposes.

In general terms (and as explained in paragraph 22 of IT-273R2), where a taxpayer claims an ITC or a rebate under the Excise Tax Act in respect of the GST/HST paid on property or services, the taxpayer must include the amount in income pursuant to paragraph 12(1)(x) of the Act. Alternatively, the taxpayer may elect, under subsections 12(2.2), 13(7.1) or paragraph 53(2)(k) of the Act, to reduce the cost of the particular property or the amount of the expense to which the GST/HST paid relates, by the amount of the assistance received. The effect of an election under subsection 12(2.2) is to reduce the amount required to be included in income under paragraph 12(1)(x) of the Act for the year in which the assistance is received and to reduce the amount of the related expense or outlay. In such a case, there is no need to add an additional amount to income in respect of the ITC claimed.

The comments in the T4002 Self employed Business, Professional, Commission, Farming, and Fishing Income Guide under the heading “Line 8230 – Other Income” provides that amounts included as other income at line 8230 include:

“grants, subsidies, incentives, or assistance you get from a government, government agency, or non-government agency. Input tax credits are considered government assistance. Include the amount you claimed on line 108 of your GST/HST return only if you cannot apply the rebate, grant, or assistance you received to reduce a particular expense or an asset's capital cost. For more information, see Grants, subsidies, and rebates”

In a situation where a taxpayer does not make a claim for an ITC or a rebate under the Excise Tax Act, the amount of GST/HST paid is included in the cost of the property or the amount of the expense to which it relates. In such a case, the GST/HST paid in respect of the expense is deductible for income tax purposes to the extent that the expense is also deductible.

Taxpayers who have elected to use the Quick Method are not entitled to claim ITCs for the GST/HST paid on current expenses and inventory under the Excise Tax Act . The Quick Method is intended to compensate the GST/HST registrant (“Registrant”) for the ITCs that normally could have been claimed in respect of the GST/HST paid on current expenses and inventory had the Registrant not chosen to use the Quick method. Registrants not electing the Quick Method must include in income the ITC received or receivable in respect of the GST/HST paid on current expenses and inventory. Since under the Quick Method, Registrants remit an amount lower than the actual GST/HST collectible, or collected, the net gain experienced when using the Quick Method is considered government assistance and included in income under paragraph 12(1)(x) of the Act.

However, as Registrants who have elected to use the Quick Method are not entitled to claim ITCs under the Excise Tax Act for GST/HST paid on current expenses and inventory, the deductible cost of these expense for income tax purposes will include the GST/HST paid in respect of these expense.

Lines 3D – 3F (and lines 3K-3M) of the T2125 apply in situations where the Quick Method is used and are used to calculate the amount of government assistance that is to be included in business income. It is our view that lines 3D – 3F (and lines 3K-3M) of the T2125 are correct, as they properly calculate the amount of government assistance to be included in income for individuals who are using the Quick Method. However, we do agree that the instructions on the T2125 should clearly state that for Parts 3D, 4 and 5 of the T2125, if you are using the Quick Method to include the GST/HST paid when you calculate the cost of goods sold, expenses or net income (loss). We will review the T2125 to ensure that these instructions are clear.

We trust our comments will be of assistance.

Yours truly,

Lori Merrigan
Manager
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate

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