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Employee Reimbursement: Using the Factor Method to Ease Your Administrative Burden

19/10/2015


When an employer pays a reimbursement of expenses (e.g. meals, parking, hotels, taxis, etc.) incurred by employees in the course of their employment, the employer can recover the GST / HST as input tax credits (ITCs) when filing their GST / HST return. The employer may choose one of two methods to claim the ITCs:

1) The actual GST/HST paid as shown on the receipt or

2) a factor method.

A GST / HST registrant employer would be able to apply the factor method to claim ITCs on reimbursements to employees. When choosing either a factor method or claiming actual amount of ITC on invoice, the method must be consistently used throughout the year for all employees. For example, if you choose to apply the factor method to hotel expenses, the factor method must be used throughout the whole year for all employees when claiming hotel expenses.

The employer is also required to keep invoices and supporting documentation on hand to support the ITCs claimed regardless of which method it chooses to use (factor vs. actual).

The company can use the factor method to calculate ITCs providing the expense category is taxable in the first place.  Subway and Public Transportation Expenses (i.e. TTC / Go Train) are not subject to HST so you cannot claim any ITCs on these types of expenses. The second criteria to use that factor method is that 90% or more of the expenses in each category are taxable at the same GST / HST rate. In other words, if the expense category in the year can sometimes be 80% HST @ 13%, 20% GST @ 5%, you cannot use the factor method.  As an example, your Ontario employee travel across the U.S. and Canada and submits a claim of car rental expenses. As the car rental charges are made throughout Canada and the U.S., it does not meet the 90% or more test where HST at 13% would have been

charged / paid, you will then need to use the actual method.  

In Ontario, the factor method (12 / 112) is useful for expenses such as parking, meals, taxis, entertainment, fuel, postage,  where it is reasonable that 90% of more of the expense are taxable at 13%. For other purchases where there is a mixed bag of GST vs. HST vs. no tax charged, then the factor method would not be available. If the majority of expenses are incurred in Ontario, the employer may use a factor of 12 / 112 for reimbursements of expenses incurred in Ontario.  

The factors in other provinces are:
     - B.C., Alberta, Saskatchewan, Quebec and Manitoba – 4 / 104
     - Nova Scotia- 14 / 114
     - PEI – 13 / 113
     - New Brunswick, Newfoundland and Labrador – 12 / 112

The factor rates are lower than the tax rates as the Canadian Revenue Agencyrecognizes that the total expenses may include tips and other amounts that are not subject to GST  /HST.  

As an example, an employee completes an expense report for expenses incurred for consumption / use in relation to the company's activities (e.g. taking a client out for lunch / business development). The employee has attached a copy of the restaurant receipt with the expense report.

Total receipt for meals is $145.00, HST 13% @ 18.85; Tips @ $20 = total $183.85

The company can use the factor of 12 / 112 to claim an ITC of $19.69 ($183.85 x 12 / 112= $19.69) or the exact HST on receipt $18.85. However, the company will also need to adjust for the 50% restriction when claiming ITCs relating to meals and entertainment.

As you can see, using a factor method can ease the administrative burden to separate out the GST / HST on eligible expenses on employee reimbursements.