Quebec Phase-Out of ITR Restrictions Starts in 2018 | KPMG | CA

Quebec Phase-Out of ITR Restrictions Starts in 2018

Quebec Phase-Out of ITR Restrictions Starts in 2018

Quebec will be phasing out its ITR restrictions in 2018.


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Large businesses must prepare their systems for the first stage of Quebec's phase-out of the input tax refund (ITR) restrictions starting January 1, 2018. Quebec is scheduled to phase-out these restrictions under the Quebec Sales Tax (QST) over a three-year period, under the terms of its harmonization agreement with the federal government. To prepare, affected businesses may need to adjust certain accounts and calculations related to the specified property and services subject to the ITR restrictions, including common area maintenance charges and employee expense accounts.

As a result of this change, large businesses that qualify to claim ITRs should become eligible to claim 25% of the QST that becomes payable on specified goods and services as of January 1, 2018. In general, these businesses should be able to fully claim this QST as of January 1, 2021, when Quebec fully phases out its ITR restrictions.

Quebec's phase-out period timeline follows similar measures in Ontario and Prince Edward Island. Specifically, Ontario will complete the phase-out of its recaptured input tax credits (RITCs) rules on July 1, 2018, while Prince Edward Island will begin to phase out its HST RITC rules over three years, starting on April 1, 2018. Large businesses will also need to prepare their systems for these upcoming tax changes.

Currently, a "large business" that incurs QST on a specified property or a service cannot claim any 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.

A specified property or service 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.

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

  • January 1, 2018 to December 31, 2018 - 25% claim rate 
  • 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 start of phase-out period
In addition to adjusting their systems for the first stage of the phase-out period starting January 1, 2018, affected businesses will also have to consider how the phase-out may affect certain transactions, such as trade-ins of used vehicles and QST remittances related to employee taxable benefits. Quebec has released guidance on how the phase out of the ITR restrictions affect various transactions involving specified goods and services, including transactions related to:

  • Acquisitions, sales, leases, trade-ins of passenger vehicles
  • Passenger vehicles used by automobile dealers
  • Goods brought into Quebec
  • Telecommunication services
  • Transfer of property of a business and elections made by members of 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 December 19, 2017. 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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