Input Tax Credits for Employee Reimbursements

Written by: Darryl Rankin

Excise Tax Act section 175 provides that employee reimbursements for taxable purchases are treated as including GST/HST if the expenses are “in relation to” the employer’s activities.

Thus, an employer can normally claim input tax credits (ITCs) for the GST/HST component of such a reimbursement (or a rebate, where the employer is entitled to a rebate such as the public service body rebate, rather than an ITC).

In simple terms, section 175 puts the employer in the same position when reimbursing the employee for a taxable amount as if the employer had incurred the expense directly. Whatever GST/HST is normally recoverable to the employer can still be recovered, despite the fact that the employee sits “between” the employer and the supplier of the goods or services.

The same rule applies to partnerships reimbursing partners, and to charities and public institutions reimbursing their volunteers.

A common case where section 175 applies is reimbursement of hotel, travel, and meal expenses paid by employees traveling on their employers’ business.

However, Westcoast Energy (now part of Enbridge) recently lost an appeal on this issue. Westcoast ran its own employee health care plan rather than using a third-party insurer. Thus, when employees incurred reimbursable expenses under the plan, Westcoast paid the reimbursement itself.

As part of the plan, Westcoast reimbursed employees for healthcare costs subject to GST/HST — massage, acupuncture, naturopathy, and homeopathy costs. It claimed ITCs for the GST/HST portion of the health care providers’ fees.

The CRA denied these ITCs on the ground that these expenses were not incurred “in relation to activities of the employer.”

Westcoast appealed to the Tax Court of Canada, which upheld the CRA decision in 2020. Westcoast argued that these expenses were a necessary part of the compensation package it offered its employees. However, the Court ruled that the employees’ health care services (and those of their family members) were not expenses incurred “in relation to” Westcoast’s business activities.

Westcoast appealed to the Federal Court of Appeal, which on March 31, 2022, upheld the Tax Court decision for the same reasons. The Court affirmed the correctness of its 2010 decision in ExxonMobil, where employee relocation allowances were similarly held not to be “in relation to” ExxonMobil’s business.

Section 175 — along with a parallel rule for employee allowances in section 174 — is a very useful provision, but be aware that it is limited to expenses that are genuinely part of the employer’s business activities.