Holdback Input Tax Credits: Canada
You can track holdback Input Tax Credits (ITCs) for Canada.
When tracking holdback ITCs, you can include the holdback in the tax basis, or you can calculate the tax basis without holdback. Both options are discussed below.
Tax Basis Net of Holdback
This section discusses how to track standard ITCs separately from holdback ITCs. Tracking them separately ensures that holdback tax is not expensed until you release and pay the holdback amount.
To withhold holdback from the tax basis, you must first select the Tax basis is net of holdback check box in the AP Company Parameters form. When you select this check box, the system calculates the tax basis as line amount minus holdback for transactions with an associated Value Added Tax (VAT) code.
When setting up tax codes for withholding holdback from the tax basis (in the HQ Tax Codes form), you must specify a GL account for tracking standard ITCs, tracking holdback ITC payables, and a contra GL account that will hold the ITC holdback amount until holdback is released and paid. For more information, see Setting Up Tax Codes: Canada.
As you create AP transactions associated with the tax code (in the AP Transaction Entry, AP Unapproved Invoice Entry, and AP Recurring Invoices forms), the system tracks the ITCs in the appropriate accounts. The system does not expense the holdback ITC amount until you release and pay holdback. Once you release the holdback (in the AP Release Retainage form), the system moves the holdback ITC amount from the ITC holdback account to the standard ITC account.
Single Level Tax Code Example
Tables 1, 2, and 3 display how the system processes a $1,000 AP transaction with a holdback amount of $100 and a 15% HST (Harmonized Sales Tax) rate.
|
Debit |
Credit |
|---|---|
|
Job Expense Account $1,000 |
AP Account $1,035 |
|
Standard ITC Account $135 |
Holdback AP Account $100 |
|
Holdback ITC Contra Account $15 |
Holdback ITC AP Account $15 |
|
Debit |
Credit |
|---|---|
|
AP Account $1,035 |
Cash $1,035 |
|
Debit |
Credit |
|---|---|
|
AP Account $100 |
Cash $115 |
Multi-Level Tax Code Example
If you are using a multi-level code tracking both GST and Provincial Sales Tax (PST), the system includes the PST amount in the job expense total; the PST amount is directly expensed.
Tables 4, 5, and 6 display how the system processes a $1,000 AP transaction with a holdback amount of $100, a 5% GST rate, and a 10% PST rate.
|
Debit |
Credit |
|---|---|
|
Job Expense Account (including PST) $1,100 |
AP Account $1,035 |
|
Standard ITC Account $45 |
Holdback AP Account $110 |
|
Holdback ITC Contra Account $5 |
Holdback ITC AP Account $5 |
|
Debit |
Credit |
|---|---|
|
AP Account $1,035 |
Cash $1,035 |
|
Debit |
Credit |
|---|---|
|
AP Account $100 |
Cash $115 |
Include Holdback in Tax Basis
When you include the holdback in the tax basis, you can either track the retainage ITCs in a separate GL account from standard ITCs, or you can track both types of ITCs in the same account.
Tracking ITCs Separately
When setting up VAT tax codes for including holdback in the tax basis (in HQ Tax Codes), but tracking ITCs separately, you must specify a GL account for tracking standard ITCs and one for tracking holdback ITC payables. For more information on creating tax codes, see About the HQ Tax Codes Form.
As you create transactions associated with the tax code, the system tracks the ITCs in two accounts. Once you release the holdback (AP Release Retainage form), the system moves the holdback ITC amount from the ITC holdback account to the standard ITC account.
Tables 7, 8, and 9 display how the system processes a $1,000 AP transaction with a holdback amount of $100 and a 15% HST rate.
|
Debit |
Credit |
|---|---|
|
Job Expense Account $1,000 |
AP Account $1,035 |
|
Standard ITC Account $135 |
Holdback AP Account $115 |
|
Holdback ITC Account $15 |
|
Debit |
Credit |
|---|---|
|
AP Account $1,035 |
Cash $1,035 |
|
Debit |
Credit |
|---|---|
|
AP Account $100 |
Cash $100 |
Tracking ITCs Together
When you include the holdback in the tax basis (in the HQ Tax Codes form) and you are tracking holdback and standard ITCs togther, you only need to specify a single ITC-tracking GL account. When tracking ITCs together, you can manually exclude holdback from the tax basis. When doing so, enter the transaction as normal, but manually decrease the amount in the Basis field by the holdback amount and process the transaction.
Table 10 displays how the system processes a $1,000 AP transaction with a holdback amount of $100 and a 15% HST rate.
|
Debit |
Credit |
|---|---|
|
Job Expense Account $1,000 |
AP Account $1,035 |
|
ITC Account $135 |
Holdback AP Account $100 |
When you manually exclude the holdback from the tax basis, you must create an additional transaction for the holdback tax amount (after you have released holdback). To do this, enter a transaction for the holdback amount in the Tax Basis field. Using the scenario from Table 7, you would enter $100 in the Tax Basis field. The system would then automatically calculate $5 as the tax amount, displaying it in the Tax Amt field. Process the transaction as normal and complete any additional steps to complete the transaction. For more information, see Processing VAT Invoices.
