Warranty reimbursements

Warrantors of goods can claim input tax credits (ITCs) for the GST/HST part of reimbursements they make to warranty holders for goods or services such as repairs covered under the terms of a warranty and provided by a third party.

For instance, a warrantor may reimburse a warranty holder when the warranty holder pays for repairs due to an emergency or due to the distance from the warrantor's own authorized repair facility.

The ITC you as the warrantor can claim is based on the part of the total cost that you reimburse the warranty holder. Calculate your ITC using the formula:

A × (B ÷ C)

A is the GST/HST payable by the warranty holder for the goods or services;

B is the amount of the reimbursement; and

C is the cost to the warranty holder of the repair.

You must include with the reimbursement a written statement that a portion of the reimbursement represents GST/HST.

Example 1
Michael, a GST/HST-registered sales person, uses his car to meet clients. His car breaks down, and he calls for emergency roadside assistance, which is covered under warranty. There is no dealer nearby, and the only repair shop within towing distance is an independent garage. The garage tows and repairs the car for a total of $636 ($500 plus $100 for remote service charge, plus $36 GST). Michael sends this bill to the warrantor who agrees to pay the bill except for the remote service charge. There is a $50 deductible plus GST under the warranty. The warrantor reimburses Michael $477 calculated as follows:

Using the formula above, the warrantor can claim an ITC of $27 calculated as follows:

ITC
= $36.00 × ($477.00 ÷ $636.00)
= $36.00 × 0.75
= $27.00

A warranty holder who is registered for GST/HST can claim an ITC or a rebate. If the warranty holder claims an ITC or rebate and is later reimbursed by the warrantor, the warranty holder has to repay the ITC or rebate for the part that he or she was entitled to claim. The warranty holder remits an amount calculated using the following formula:

D× (E÷ F)

D is the GST/HST reimbursed;

E is the total of ITCs and rebates that the warranty holder was entitled to claim for the goods or services;

F is the GST/HST the warranty holder paid or owes for the goods or services.

Example 2
If Michael uses his car 80% in commercial activities, he is eligible for an ITC of $28.80 ($36× 80%) for the car repair charges described in Example 1. If he claimed this ITC and is later reimbursed by the warrantor, Michael has to repay $21.60 by adding this amount to line 103 of his GST/HST return for the reporting period in which he received the reimbursement.

GST to remit
= $27.00 × ($28.80 ÷ $36.00)
= $27.00 × 0.8
= $21.60