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6th Digital Transformation Trade Show – Palais des congrès de Montréal

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Last week, the 6th Digital Transformation Trade Show took place at the Palais des congrès de Montréal.

We had the opportunity to discuss with the main actors of this change aimed at improving the productivity of organizations. At this fair, consultants and advisers in digital transformation were present as well as representatives of medium and large companies, organizations of the municipal sector, the health sector, etc…

We discussed Advataxes as a digital employee and volunteer expense reporting solution designed for the Canadian tax landscape:

GST/HST/QST Features

  • Built to handle the exact method
  • Automate GST/HST/QST recoverable on meal expenses excluding tips
  • Automate GST/HST/QST recoverable on allowances
  • Send an alert when 5000 KM has been reached
  • NPOs & FIs: Store both GST/HST/QST payable & recoverable
  • NPOs: automate different HST recovery rates for each province
  • No tax code; no requirements for employees to be tax practitioners

Online Expense Report Tools

  • IOS/Android App
  • Distance calculator
  • OCR
  • Digital image attached to each expense
  • Credit card transactions upload
  • Up to 2 levels of approval
  • Automatically covert 8 foreign currencies
  • Department code, work order, cost center & project numbers can be added
  • Accounting integration – CSV output to configure
  • Encrypted transmission
  • Data stored in a Canadian data center
  • French or English at the employee level

Ad Valorem

Revenu Quebec will strengthen its mission in terms of Audit

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Within the tabling of the Quebec budget on March 22, 2023, the Quebec Government has notably announced the hiring of additional staff which will enable them to strengthen its mission in terms of audits. Budget 2023-2024 provides expenditures of $117 million over 5 years to ensure tax fairness.

One of the objectives is to “Step up its inspection activities in all sectors of activity, …” as stated in the budget documents. The Quebec government estimates that this measure will increase revenues by $200 million over 5 years. This plan also targets high-risk sectors.

Significant Per-Kilometer Allowance Rate Increase in 2023

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The per-kilometer rate that is considered reasonable in 2023 is set to 68 cents in a province for the first 5,000 kilometer. This is a 11% increase in comparison to the rate set for the previous year which was 61 cents that has been implemented by both the Canada Revenue Agency and Revenu Quebec. This is a substantial increase from the KM rate of the year 2022 when we compare with other annual increases. For amounts after 5,000 kilometers driven, the rate is set to 62 cents. This rule is applicable both for GST/HST/QST purposes and for income tax purposes.

1- Example

So, lets take as an example a company where it is projected that on average their employees will be reimbursed the maximum rate in 2023 and these employees will drive 16,000 kilometers in relation to activities of that company.

The amount to be reimbursed to each employee would be $10,220 and is detailed as follows:

KM projected in relation to employer activities Reimbursement rate Amount paid
First 5,000 KM 5,000 KM 68 cents $ 3,400
After 5,000 KM 11,000 KM 62 cents $ 6,820
Total 16,000 KM $10,220

Assuming that this company incurred expenses exclusively in the course of commercial activities, and has one employee in British Columbia, one in Ontario and another one in Nova Scotia, the projected input tax credits on kilometer allowances in 2023 to these 3 employees would be about $3K or roughly 10% of all kilometer allowances paid.

Employee A in BC Employee B in ON Employee C in NS Total
Projected KM in 2023 16,000 16,000 16,000 48,000
Projected Allowance $10,220 $10,220 $10,220 $30,660
Tax fraction 5/105 13/113 15/115
Input tax credits $486.67 $1,175.75 $1,333.04 $2,995.46

2- The Territories

These rates are higher in the three territories (Yukon, Northwest Territories and Nunavut). The first 5,000 KM is set to a maximum of 72 cents and the rate for over 5,000 KM driven is set to a maximum of 66 cents.

3- What to do and what not to do

All daily trips should be recorded in support of kilometer allowances paid, so information to keep on record would be the date of the trip, the origin and the destination. You cannot reimburse the employee for expenses relating to the use of that vehicle. For instance, that company is not entitled to reimburse to these 3 employees gas or repair expenses for the use of their vehicles (there is however a very specific exception for insurance premium). If the company would also reimburse expenses for the use of their vehicles, it is expected that all ITCs claimed would be denied during the course of a tax audit, as all allowances and vehicle expenses would be deemed not reasonable.

Yet, if for instance, the employee in BC has to go to a meeting in Phoenix Arizona, gets on a plane and once at the Phoenix airport rents a car and incurs gas expenses, the reimbursement of these expenses will not deny the input tax credit claimed on business kilometer allowance in BC since these are not expenses relating to the use of that employee’s vehicle.

4- How to make employees’ life easier in complying with tax rules on KM allowances

There are ways to alleviate the burden that employees have inherited in managing the kilometer allowance provision of the Income Tax Act, the Québec Taxation Act, the Excise Tax Act and an Act respecting the Québec sales tax.

4.1 Distance calculator

Provide employees with a distance calculator, (see our distance calculator webpage) calculating the number of kilometers driven between the origin and the destination. The distance calculator can be used by entering two addresses. It can also be used by entering points of interest. For instance, an employee can write “Starbucks Abbotsford” and a selection of Starbucks in Abbotsford will appear for that employee to select. That employee can also write “hospital Surrey” and the address of the Surrey Memorial Hospital will appear. So, the days where the employee had to religiously write, before the start of any day trip, the kilometers shown on his dashboard and do the same at the end of his day trip, in order to get the total kilometers driven for business purposes, there are now alternative methods to it. The distance calculator will assist each employee in calculating the number of kilometers driven each day. The distance calculator is accessible both with the expense report software Advataxes web URL and the App.

4.2 Comment box

Another useful item, is to provide a comment box for all kilometer allowance expenses, so each employee can add, as the case may be, any comments regarding business day trips.

4.3 No tax codes

Making sure that employees don’t have to select a tax code, is another major way of making it easier to fill out expense reports. Employees who are by and large salesman, technicians and professionals are not sales tax practitioners, thus any requirements that they apply proper tax rules is a risky tax management structure. Advataxes is instead based on a matrix approach to calculate both GST/HST/QST paid and GST/HST/QST recoverable (see our page GST/HST/QST Parameters).

4.4 Fixed kilometer rate

To avoid clerical errors by selecting an erroneous kilometer rate, a drop down with a fixed kilometer rate for each employee where only the one that is applicable to that employee at a given point in the year is the one that is available.

5- Safeguard for not reimbursing 68 cents per kilometer for those exceeding the 5,000 km threshold

It is essential not to exceed the applicable threshold since these amounts will be deemed non reasonable. For instance, if no one is keeping track of how many kilometers an employee has incurred in a year where the employee still gets reimbursed 68 cents even though that employee exceeded 5,000 km of travel in 2023 in the course of an employment is problematic. It is expected that during an audit, tax claims will be denied.

In order to comply with the threshold rule, a warning informing that the 5,000 KM threshold for a given employee has been reached is sent by Advataxes, in order that the lower rate be chosen for a given employee.

6- Safeguard for controlling that no expenses regarding the use of an employee vehicle are reimbursed

As mentioned before, a company paying kilometer allowances to its employees can’t reimburse these same employees for expenses relating to their vehicle. In that respect the “search” and the “sort” tools can be used to investigate if ever vehicle expenses where also reimbursed to employees and if it is the case, rectify erroneous behaviors.

7- Conclusion

Both the Canada Revenue Agency and Revenu Quebec are granting, in 2023, a much higher kilometer allowance where input can be claimed.

Although this measure is a better financial opportunity it bears a greater financial risk in case of non compliance. So, organizations who are fully taking advantage of these 2023 KM rates should ascertain the following controls exist:

1) All business trips are substantiated (i.e. date, origin, destination…)

2) Expenses relating to the use of that vehicle are not reimbursed

3) To lower the rate per kilometer paid to each employee in a province from 68 cents to 62 cents once the 5,000 kilometers threshold has been reached in 2023 (from 72 cents to 66 cents in a territory).

NPO claiming GST/HST Rebates on Expenses Incurred in Different Provinces

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Non-Profit Organizations (NPO) have inherited a series of complex GST/HST rules both for claiming GST/HST rebates and reporting GST/HST rebates when it comes to expenses incurred in different provinces.

These rules will impact the sales tax automation on expense reports. In this blog we explain why a Quebec CEGEP can claim 67% of the GST paid in Quebec but 26% of the HST paid on expenses while attending a conference in Ontario and 22% of the HST paid for attending athletic activities in New Brunswick.

For expenses (input) in connection to exempt supplies (output), those not incurred in the course of commercial activities, NPOs are entitled to claim various different rebate rates for the GST/the federal component of the HST and, for the provincial portion of the HST also called the Provincial Value Added Tax (PVAT).

HST Breakdown

Participating Province Federal Component of the HST Provincial Component of the HST (PVAT) HST
Ontario 5% 8% 13%
New Brunswick 5% 10% 15%
Nova Scotia 5% 10% 15%
Prince-Edward Island 5% 10% 15%
Newfoundland and Labrador 5% 10% 15%

GST Public Service Body Rebate Rates

Public Service Body activity type GST and the federal component of the HST
Municipalities 100%
Universities & Public Colleges 67%
School Authorities 68%
Hospital Authority 83%
Facility operator/external supplier 83%
Charities and Qualifying NPO’s 50%

Rebate rates for the provincial component of the HST, should the PSB have a permanent establishment in a province

Public Service Body Rebate activity type Provincial component of the HST
ON NB NS PEI NFL
Municipalities 78% 57.14% 57.14% 0% 57.14%
Universities & Public Colleges 78% 0% 67% 0% 0%
School Authorities 93% 0% 68% 0% 0%
Hospital Authority 87% 0% 83% 0% 0%
Facility operator/external supplier 87% 50% 50% 0% 0%
Charities and Qualifying NPO’s 82% 50% 50% 50% 50%

So, lets take an example of a public college with a permanent establishment in Québec and where the staff travel regularly to New Brunswick for athletic activities, and to Ontario to attend conferences. Their PVAT rebate rate entitlement would be nil.

CEGEP with permanent establishment only in Québec:

Public Service Body activity type Federal component of the HST PVAT Component
ON NB
Universities & Public Colleges 67% 0% 0%

The proportion of the HST paid per province that is recoverable is as follows:

Example Expenses in
Quebec College ON NB
GST/HST Rate 13% 15%
Rebate on the 5% federal component 67% 67%
Rebate on the PVAT component (8% or 10%) 0% 0%
Rebate on the HST paid 26% 22%

So, in this instance based on the HST paid and where the HST was paid, the proportion of the HST to recover differs from 26% in Ontario and 22% in New Brunswick. For the GST paid in Quebec, it is subject to a recovery of 67%.

As for the QST paid these are the rebate rates available.

Public Service Body Rebate activity type QST
Municipalities 50%
Universities & Public Colleges 47%
School Authorities 47%
Hospital Authority 51.5%
Facility operator/external supplier 51.5%
Charities and Qualifying NPO’s 50%

The CEGEP is entitled to a 47% QST rebate.

Reporting Rules

Contrary to expenses that are incurred in the course of commercial activities where the GST and the HST claimable are blended together for reporting purposes to tax authorities, in the case of rebate claimed by NPOs, above the GST component had to be claimed separately from the PVAT component. So additional information has to be obtained by these NPOs for GST/HST compliance purposes. (See CRA form GST66 entitled “Application for GST/HST Pubic Service Bodies’ Rebate and GST Self-Government Refund”, CRA form RC7066 entitled “Provincial Schedule – GST/HST Public Service Bodies Rebate”, Revenu Quebec form FP-2066 entitled « GST/HST & QST Public Service Bodies Rebate Application” & Revenu Quebec form FP66.A Provincial Schedule – GST/HST Public Service Bodies’s Rebate)

NPO claiming GST/HST Rebates on Expenses Incurred in Different Provinces

GST/HST/QST Exact Method or Factors Method

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A sales tax matter that all organizations reimbursing expenses to employees in Canada have to address is which method should they use? There are 2 methods to choose from as advertised by tax authorities: the exact method or the factors method. (See also our Exact Method VS Factors Method page).

1 – The Exact Method

Claiming GST HST rebate and input tax credit (ITC) is governed by Part IX of the Excise Tax Act (ETA). There are specific provisions that address reimbursement of expenses to employees, members of a partnership, members of the board and, volunteers of non-profit organizations such as section 175 of the ETA. That section states that if any of the persons mentioned before paid the tax payable, as indicated on an invoice, with respect to an acquisition that is subsequently reimbursed by the employer, then the tax paid by the employee and all is deemed paid by the employer. Assuming the employer respects all conditions in claiming a GST rebate, a HST rebate or an ITC, such as when the acquisition is used in relation of the activities of the employer, then simply put, the tax paid on an invoice is the tax to claim by the employer. That is what Canadian tax authorities called the “exact method” but that is nothing more than the law applied to employee expenses.

2 – The Factors Method – The Origin

At the time of the introduction of the GST in 1991 when there was a single federal tax rate across the country of 7%, the QST wasn’t effective, the economy was based on paper documents, there was no internet; the federal government introduced an administrative method called the factors method. That method could be applied to reimbursement of expenses, but not to allowances, had to account of the 50% reduction applicable to meals/entertainment and could only be applied when 90% of all expenses of an expense report are taxable, other than taxable at a rate of 0%.

Back then that method had a certain appeal despite the obvious shortcomings of being an administrative method so organizations have no legal recourse in case of litigation with tax authorities and the 90% test per expense report is somewhat problematic as you need to use the exact method on each expense report to see if you would qualify to use the factors method, which defy the purpose.
Yet the administrative task of handling expense reports supported entirely by paper receipts and the fact that there was only one value added tax rate for the entire country made the factors method an attractive method for several.

3 – The Factors Method – 32 years later

Fast forward 32 years later in an environment where there is HST at 15%, HST at 13% GST at 5% across Canada and a QST at 9.975% and more purchases from foreign suppliers where tax is not collected are made by employees so the question as to whether expense reports qualify to a significant extent to the factors method under the 90% rule is more problematic than ever. Registrants may simply not be entitled to recover any tax on expense reports despite incurring some taxable expenses on it, simply because 90% of those expenses are not taxable. Furthermore, the fact that the factors method is purely administrative removes legal ground to challenge assessments.

4 – The Exact method: Technologies to the Rescue

On the other hand, the paper handling issues of expense reports that existed 30 years is no longer as huge as it was. Today employees get more and more only digital images of those receipts as several organizations no longer issue paper receipts in the first place. As for those still issuing paper receipts, mainly restaurant bills and parking receipts, taking pictures of their receipts with their smartphone and uploading them in an app where fields can be deciphered with the OCR, so it is an efficient way of handling these documents. As for handling the current sales tax rules of the Canadian tax landscape, Advataxes incorporates matrices at the provincial level as well as at the expense level, there are no tax codes to create and to choose from.

5 – Tax Codes and Meals with Tips Issue

The tax code method on a meal expense with various percentages of tip amount where the latter one is not subject to tax is an issue since the tax code is supposed to calculate the tax to recover. What percentage can be used on one expense representing one supply, where one part is subject to tax (the meal) and another one is of a discretionary amount (the optional tip) not subject to tax? Is the exact recoverable amount posted?

6 – Safeguards from software

Safeguards and rules have been implemented in Advataxes for recoverable GST/HST and QST. For instance, GST/HST and QST payable is triggered for the year 2023 on KM allowances for a maximum of 68 cents in 2023 in a province and for 72 cents in a territory. On meal expenses there is a specific box for tip amount so the tax to recover is solely based on the expense amount before tip. It’s the exact amount that is recovered.

7 – Conclusion

The exact method is today a wise choice in an environment with substantial Canadian sales tax automation and where the organization has meaningful sales tax recoverable amount (see our page Simulation). If an expense qualifies for a tax refund, then claim it, and when an expense doesn’t qualify for a tax refund, don’t claim it. This is Advataxes sales tax management approach; it is implemented at the expense level. Advataxes is built so each digital receipt can be attached to each expense. All digital receipts can be attached to an expense report with a smartphone and the OCR can populate most fields. It is an easy way to fill out an expense report. The benefit of this cloud solution is how easy it is to review an expense report. A reviewer has access to each expense report and all digital images, side by side with each expense.

About Advataxes

Advataxes is an online accounting software for employee expenses that automates recoverable GST/HST and QST for small, medium and large businesses. Employees can fill out and submit their expense reports to their supervisors from anywhere using their PC, tablet or smartphone in no time. This online software is available in English and French. Advataxes is a product of Ad Valorem which is a member of Antea an internationnal association of independent firms.

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