Reclaim HST through the SR&ED Program

From July 1, 2010, until June 30, 2018, with the introduction of the HST in Ontario and British Columbia, businesses with sales above $10m (large companies) will pay HST on telecom, energy, meals and entertainment expenses (specified services) BUT unlike smaller businesses, will not be able to reclaim the HST. Simply put, the HST on specified services is an additional non-recoverable cost. This means that for every $100,000 spent on specified services 7% or $7,000 will be an additional unrecoverable expense (in BC).

It gets worse. On top of the pure non-recoverable HST expense, there is an added administrative burden as Companies subject to the ‘recapture’ requirement will not be allowed to simply forego claiming these recaptured ITCs in their calculation of net tax. Instead, they will be required to separately identify any recaptured ITCs in their GST/HST returns.

Happily there is one way for large companies to receive the HST payment back from the government. If a large company claims SR&ED, the specified services included in the SR&ED are not subject to the recaptured ITC. Put simply, you can reclaim the HST paid on specified services used in SR&ED activities.

The actual mechanism for determining how much of the specified services to include in a SR&ED claim may be complex if a direct costing method is inappropriate. If specified service expenses are indirectly allocated, a CRA directed proxy method should be used. The actual proxy calculation has been laid out in a technical information bulletin entitled “Temporary Recapture of Input Tax Credits in Ontario and British Columbia.”

I recommend that all businesses with sales above $10m review their SR&ED eligibility with a SR&ED specialist.