Example of Tax Recovery

This example shows the tax setup and associated tax conditions that drive tax recovery. Set up tax rules to assign specific recovery rates instead of using the default recovery rates defined for the tax.

Two recovery types are used to show the primary and secondary recovery type options for a tax.

In Canada, the Goods and Services Tax (GST) applies to the supply of most property and services in Canada. However, some provinces have combined their provincial sales tax with the GST to create the Harmonized Sales Tax (HST). This system applies to British Columbia, Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador. In this context, these provinces are known as the participating provinces. Generally, HST applies to the same base of property and services as GST. In countries like Canada, some or all of the taxes on business transactions for registered companies are recoverable taxes.

ABC Corporation is a business located in the province of British Columbia. The sales invoice indicates that ABC purchases books for the purposes of resale. Here's ABC's existing tax setup:

Tax	Description
CA GST and HST	A GST and HST-based tax regime
CA HST	An HST-based tax
CA HST STANDARD	The default HST-based tax status for the CA HST
CA HST ZERO FED REC RATE and CA HST ZERO PROV REC RATE	0% recovery rates for HST, which are set as the default recovery rates for the CA HST
CA HST STANDARD RATE	The default HST-based tax rate for the CA HST Note: The percentage rate is 13% for most provinces, and 12% for British Columbia.

Here are some tax implications that apply in this scenario:

• ABC can recover 100% of both federal and provincial components of HST on books bought for resale.

  • Federal and provincial components of HST have zero recovery rates. These are set as the default recovery rates for the HST.

  • Recovery rates for most of the participating provinces must address the full recovery of the 13% HST rate.

  • Recovery rates for British Columbia must address the 12% HST rate.

  • Recovery rate rules must assign nondefault recovery rates for resale purchases.

• ABC can't recover HST on consumable items, such as computers for use in ABC's store. Default zero recovery rates apply in this case.

Perform these steps:

• Create tax recovery rates

• Create an intended use fiscal classification

• Create recovery rate rules

Create Tax Recovery Rates

For most participating provinces in Canada, the HST is 13%. Out of this, 5% is the federal component and 8% is the provincial component.

Create the tax recovery rates for these provinces considering these components:

• 38.46% for the federal component of HST

• 61.54% for the provincial component of HST

1. On the Create Tax Recovery Rate page, enter the name of the tax regime as CA GST and HST.

2. Select the configuration owner for this tax recovery rate. To minimize configuration and maintenance costs, select Global Configuration Owner as the configuration owner.

3. Select the HST tax, CA HST.

4. Enter the name of the tax recovery rate you are defining, such as CA HST STD FED REC RATE.

5. Select PREC as the recovery type.

6. In the recovery rate periods table, enter 38.46 as the percentage recovery rate, and an effective start date.

7. Click Save and Close.

8. Repeat steps 1 to 7 to create the tax recovery rate CA HST STD PROV REC RATE. Set the recovery type as SREC, and a percentage recovery rate of 61.54%.

Create Tax Recovery Rates for British Columbia

For British Columbia, where the HST rate is 12%, you need a federal recovery rate to address the 5% federal component. You also need a provincial recovery rate to address the 7% provincial component. Create a tax recovery rate with these components for British Columbia:

• 41.67% for the federal component of HST

• 58.33% for the provincial component of HST

1. On the Create Tax Recovery Rate page, enter the name of the tax regime, CA GST and HST.

2. Select the configuration owner for this tax recovery rate. To minimize configuration and maintenance costs, select Global Configuration Owner as the configuration owner.

3. Select the HST tax, CA HST.

4. Enter the name of the tax recovery rate you are creating, such as CA HST BC FED REC RATE.

5. Select PREC as the recovery type.

6. In the recovery rate periods table, enter 41.67 as the percentage recovery rate, and an effective start date.

7. Click Save and Close.

8. Repeat steps 1 to 7 to create the tax recovery rate, CA HST BC PROV REC RATE. Set the recovery type as SREC, and a percentage recovery rate of 58.33%.

For British Columbia, where the HST rate is 12%, you need a federal recovery rate to address the 5% federal component. You also need a provincial recovery rate to address the 7% provincial component. Create a tax recovery rate with these components for British Columbia:

• 41.67% for the federal component of HST

• 58.33% for the provincial component of HST

1. On the Create Tax Recovery Rate page, enter the name of the tax regime, CA GST and HST.

2. Select the configuration owner for this tax recovery rate. To minimize configuration and maintenance costs, select Global Configuration Owner as the configuration owner.

3. Select the HST tax, CA HST.

4. Enter the name of the tax recovery rate you are creating, such as CA HST BC FED REC RATE.

5. Select PREC as the recovery type.

6. In the recovery rate periods table, enter 41.67 as the percentage recovery rate, and an effective start date.

7. Click Save and Close.

8. Repeat steps 1 to 7 to create the tax recovery rate, CA HST BC PROV REC RATE. Set the recovery type as SREC, and a percentage recovery rate of 58.33%.

Create Intended Use Fiscal Classification

Create an intended use fiscal classification for resale of books. An intended use fiscal classification is a tax classification based on the purpose for which the product is used.

1. In the Create Fiscal Classification Code dialog box, enter a code for the classification, such as CA INTENDED USE RESALE.

2. Enter a name for this classification, such as CA Intended Use Resale.

3. Optionally, select Canada as the country and enter a start date, such as 1/01/2001.

4. Click Save and Close.

Create Recovery Rate Rules

Create the recovery rate rules that apply to most participating provinces when the conditions for HST recovery are met. If you remember, the default tax recovery rate on HST is 0% at the federal and provincial levels.

1. On the Create Determine Recovery Rate Rule page, select these options: Global Configuration Owner as the configuration owner, CA GST and HST as the tax regime, and CA HST as the tax.

2. Enter the code and name of the tax recovery rate rule you are creating, such as CA HST FED RECOVERY RULE. Select the start date and PREC as the recovery type code.

3. Create or select a tax determining factor set and an associated tax condition set. Keep in mind that the intended use of the acquired product is the intended use fiscal classification you defined earlier, CA INTENDED USE RESALE.

   When this condition is met, 100% recovery rate for the federal component is applicable.

4. For the tax condition set, assign the result of CA HST STD FED REC RATE.

5. Assign a rule order, such as 100.

6. Click Save and Close.

7. Repeat steps 1 to 6 to create the standard provincial recovery rule, CA HST PROV RECOVERY RULE. Set the recovery type code as SREC, a result of CA HST STD PROV REC RATE, and a rule order of 110.

Create Tax Recovery Rule for British Columbia

Create the recovery rate rules that apply to British Columbia when the conditions for HST recovery are met.

1. On the Create Determine Recovery Rate Rule page, select these options: Global Configuration Owner as the configuration owner, CA GST and HST as the tax regime, and CA HST as the tax.

2. Enter the code and name of the tax recovery rate rule you are creating, such as CA HST BC FED RECOVERY RULE. Select the start date, and PREC as the recovery type code.

3. Create or select a tax determining factor set and an associated tax condition set. Set the ship-to location as British Columbia. Keep in mind that intended use of the acquired product is the intended use fiscal classification you defined earlier, CA INTENDED USE RESALE.

   When this condition is met, 100% recovery rate for the federal component is applicable.

4. For the tax condition set, assign the result of CA HST BC FED REC RATE.

5. Assign a rule order, such as 50, that gives a higher priority to this rule than the 2 rules you created previously.

6. Click Save and Close.

7. Repeat steps 1 to 6 to create the provincial recovery rule for British Columbia, CA HST BC PROV RECOVERY RULE. Set the recovery type code as SREC, a result of CA HST BC PROV REC RATE, and a rule order of 55.

   For ABC's transactions in Canada, the previous setup determines these conditions:

   • HST is applicable and is calculated at a 13% rate for most participating provinces. However, it's the rate is 12% for British Columbia.

   • The intended resale of these books makes these transactions eligible for 100% tax recovery.

   • For most participating provinces, tax recovery rate is 38.46% for the federal component, and 61.54% for the provincial component.

   • For British Columbia, tax recovery rate is 41.67% for the federal component, and 58.33% for the provincial component.