ITCs - Repairs due to fire (INSURANCE CLAIM)

Husband and wife own a business (partnership) and a building where the business operates on the main floor and residential units are rented out on the top floor.

There was a fire at the business which damaged the main floor and two apartments above.

A property damage restoration company repaired the damage and billed the business for the HST on the repair service. The repair invoice was made out to the business name and the description states the work was completed on the business and the two apartments.

Question: Should ALL the HST paid on the restoration service be claimed?

Concern: The portion of work done on the apartments may not be eligible because the residential units are not an HST-registered business. However, the fire originated at the business which is HST-registered and the claim was made on business insurance.

I’m thinking of two possible outcomes:

  1. Claim all ITCs - damage was caused by business and business insurance covered claim
  2. Claim a portion of ITC’s which is proportional to business sqft / [business sqft + apartments sqft] and tell taxpayer to go to the insurance company to recover the tax portion that cannot be claimed.

I have looked at 17-16 GST/HST Treatment of Insurance Claims. Specifically, paragraphs 17-20.
The insurer is obligated to cover the tax portion unless the insured is able to claim an ITC to make them whole.

Does anyone have any experience with a similar situation? Should all or part of the HST be claimed or part?

I would call the GST/HST Rulings Directorate and ask them.

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@Nezzer Is this the number you have? 1-800-959-8287

Yes, that’s the number.

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Please let us know what they say. This is an interesting, if rare, occurrence. Would be curious to know how they handle it. One could make a decent case either for allowing the entire GST/HST or rejecting part of it and having the insured go back to the insurance company for compensation on the uncovered portion.

Either way, the client should not be out of pocket at the end of the day.

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Called GST/HST phone number.

This is not verbatim what they said but close.

Do not to claim the HST on the portion related to the apartments.

  • Long term commercial rent is excluded from the definition of commercial activity.

They mentioned the following (regarding 90% or more for commercial activities) from GST/HST memorandum 8.3:

Use or intended use in commercial activities (other than financial institutions)

14. Under subsections 141(1) and (2), where substantially all (i.e., 90% or more) of the consumption or use of property or a service (or intended consumption or use) by a person, other than a financial institution, is in the course of its commercial activities, all of the consumption or use of the property or service is deemed to be in the course of those activities. As a result, where a person has satisfied all of the criteria for claiming an ITC, the person may claim an ITC equal to 100% of the tax paid or payable in respect of the property or service.

Ironically, the damage relating to the appartments may be less than 10% (it might have just been smoke damage).

Regardless I agree with the following:

Turns out the damage relating to the apartments is more than 10%.
As a result, the tax paid on the repair of the apartments cannot be claimed as an ITC.
The insured must go back to the insurance company for compensation on the uncovered portion.

Does anyone have a recommendation on which account type/name I should categorize this receivable amount that is owed to the insured from the insurance company?

Insurance receivable?

Sure, or A/R. Doesn’t really matter much on the GIFI, may matter on the F/S depending on preparation type.

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When there’s an insurance claim, like in this situation, for damage to property and the taxpayer receives a cheque from the insurance company, are there any specific bookkeeping entries required or is it more of a year-end entry?

I’m reading there might be taxable income to be recorded from my research.
I looked at the following two links:

PS - this is strictly a bookkeeping file for us.
We will not be completing the income tax return or GST/HST return.

Technically, yes - there were events that happened, with related monetary amounts. That is TRANSACTIONS OCCURRED. Typically all transactions should be recorded in the books. However, with an insurance claim like this, the net effect may be zero. If the net effect was NOT zero, then be sure to record it (i.e. the repair cost more than what the insurance paid out, or a depreciated capital asset was replaced with a new one, etc). Often, bookkeepers don’t know how to record such transactions, so they ignore them or leave them for the accountant to fix at year-end. But, if you know how to record it, do it.

The only things that should NOT be recorded until year-end are things like motor vehicle expense based on mileage - things you can’t calculate until the year is completed.

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