A Truck, a Brother's Advice, and Years of HST Credits Unwound

The situation

The plan, when Ji-ho first laid it out, was ordinary. After several years working abroad, Ji-ho moved back to Sudbury and started a small home-based business handling administrative and office-management contracts for a handful of local firms, registering for HST once revenue crossed the threshold that requires it. A used pickup truck was bought that year, partly to drive to client sites around the region and partly, honestly, as a personal vehicle for the rest of life - groceries, visits to family, the ordinary use any vehicle gets outside of work.

Ji-ho registered the business properly, kept a simple set of books, and filed HST returns on schedule. The truck was the largest purchase the business made that year, and claiming input tax credits against it seemed like a straightforward way to recover some of the HST paid on a legitimate business asset. Nothing about the return raised alarms with Ji-ho at the time; it looked like the kind of ordinary deduction any small operator takes.

The complication started before any audit letter arrived. Sung-min, Ji-ho's brother, had gone through something similar with a vehicle purchase in his own small business a few years earlier and offered advice with confidence: claim the full input tax credit on the truck, since it was used for business at least some of the time, and worry about the personal-use portion only if the CRA ever asked. Ji-ho, newly back in Canada and still getting reacquainted with how the rules worked here, took that advice at face value and claimed the credits in full rather than apportioning them to the vehicle's actual business-use share.

That approach held for about a year before a routine HST review flagged the vehicle claim. The reviewing officer requested a mileage log, found none had been kept in any consistent way, and proposed recapturing the full amount of input tax credits claimed on the truck rather than accepting any business-use portion at all, on the basis that Ji-ho could not substantiate the split. Ji-ho tried, in the weeks after the request, to piece together a picture of the year from calendar entries and old invoices, but a reconstruction assembled a year after the fact is a different thing from a log kept as the trips happened, and the reviewing officer was not obligated to accept it at face value. By the time Ji-ho called our office, the proposed recapture, with interest, sat in the range of $50,000 to $150,000, and the return that had once felt like a routine deduction now looked like the biggest financial exposure Ji-ho had faced since coming back to Canada.

Where it went wrong

The rule that governs input tax credits on property used for both business and personal purposes is not complicated in principle: a registrant may only claim credits proportional to the property's actual use in commercial activity. A vehicle used sixty percent for business supports credits on sixty percent of the HST paid, not on all of it. Sung-min's advice had skipped that apportionment step entirely, treating any business use as a licence to claim the whole amount, which is a common misunderstanding but not what the rule allows.

The deeper problem was evidentiary, not just legal. Even a partial business-use claim needs some reasonable basis - a mileage log, a calendar of client visits, fuel records tied to specific trips - and Ji-ho had kept none of that, because the advice received had suggested none of it was necessary unless the CRA asked. By the time the CRA did ask, a year had passed, and reconstructing a mileage record after the fact from memory and scattered calendar entries carries far less weight than a log kept contemporaneously.

There was a second layer to what went wrong, specific to Ji-ho's situation. Having spent several years outside the country before returning, Ji-ho had less exposure to how CRA reviews of this kind typically unfold and how quickly a proposed recapture can escalate once a registrant cannot produce supporting records. Sung-min's advice, offered with good intentions from someone who assumed his own experience generalized, had the effect of setting Ji-ho up to fail the exact test the reviewing officer would apply: not whether some business use occurred, which was true, but whether that use could be measured and documented.

By the time our office was retained, the reviewing officer, working alongside Vesna on the file once it moved to a second-level review, had already proposed recapturing the credits in full, treating the absence of a log as equivalent to the absence of any business use at all - a harsher position than the underlying facts actually supported, but one Ji-ho's own record-keeping had left room for the CRA to take. Sung-min, for his part, felt responsible once he learned how far the file had escalated, and offered to help gather whatever records he could recall about the trips he had seen Ji-ho take, though by then the value of memory-based recollection was limited next to the kind of contemporaneous documentation the reviewer wanted to see.

What we did

1. Reviewed the full year of activity against calendar entries, client contracts, and fuel purchase locations to reconstruct a defensible estimate of the truck's actual business-use share, since no contemporaneous mileage log existed and the reconstruction had to be built from whatever corroborating evidence was available, including bank and card statements that placed Ji-ho at particular locations on particular days, the only way to rebuild a year already gone without a log kept at the time.
2. Cross-referenced client site addresses against fuel purchase timestamps and locations, establishing a pattern of trips that supported a business-use percentage meaningfully above zero, which mattered because the CRA's proposed position treated the missing log as proof of no business use rather than simply unproven use, and the distinction between those two things was the entire basis for challenging a full recapture.
3. Prepared a client-by-client summary of site visits for the audit period, drawn from Ji-ho's contracts and invoicing dates, to show the volume and frequency of travel the business genuinely required, giving the reconstructed mileage estimate a factual anchor beyond fuel receipts alone and letting the reviewing officer see the shape of a working year rather than a single disputed number.
4. Explained the apportionment rule plainly to Ji-ho and corrected the earlier misunderstanding going forward, since any negotiated resolution would only hold if future returns reflected a properly apportioned claim rather than repeating the same error in the next filing period, and since a second finding of the same mistake, after this one had already been explained, would be viewed far less sympathetically by the CRA than a first-time misunderstanding.
5. Presented the reconstructed evidence to Vesna at second-level review, arguing for a business-use percentage supported by the site-visit pattern rather than the CRA's full recapture, and acknowledging directly that the absence of a contemporaneous log weakened, but did not eliminate, the claim. Conceding that weakness up front, rather than overstating the strength of a reconstructed record, was itself part of the strategy, since a reviewer is more likely to credit an argument that is honest about its own limits.
6. Negotiated a compromise business-use percentage that fell meaningfully below what Ji-ho had originally claimed but well above the zero percent the CRA had proposed, reflecting the genuine uncertainty a reconstructed record carries compared to one kept at the time, and framing the figure as a reasonable middle ground rather than a concession that either side's original position had been entirely correct.
7. Set up a mileage-tracking practice going forward, including a simple log format and a monthly reconciliation habit, so any future vehicle-related claim would rest on contemporaneous records rather than reconstruction after the fact. The habit cost Ji-ho a few minutes a week, a trivial amount of effort measured against what a second unsubstantiated claim could cost if the CRA ever reviewed the business again.

The outcome

The CRA accepted a revised business-use percentage for the truck that restored a meaningful portion of the input tax credits originally claimed, but well short of the full amount. The recapture was reduced from the CRA's initial full-disallowance position to a partial adjustment reflecting a business-use share the reconstructed evidence could actually support, with the balance of the original claim - the portion attributable to personal use - conceded.

Neither side got everything. The CRA gave up its position that no business use had occurred at all, which the site-visit and fuel-purchase evidence made difficult to sustain. Ji-ho gave up the portion of the credits that reconstruction genuinely could not support, accepting that a year-old estimate without a contemporaneous log was never going to fully replace one. Interest on the sustained portion of the recapture still applied, calculated from the original filing period rather than the date of the reassessment, which meant the final bill was noticeably higher than the disallowed credits alone.

The compromise closed the file without a formal appeal, which mattered given how much the outcome depended on judgment calls about a reconstructed record rather than a clear factual dispute a hearing could resolve more definitively - a tribunal presented with the same evidence might reasonably have landed anywhere within the range the negotiation covered, and the cost of finding out was not worth the difference for either side. Ji-ho has kept the mileage log since, and it has already made the following year's HST return more straightforward to prepare and, if ever reviewed again, considerably easier to defend. The conversation with Sung-min afterward was, by Ji-ho's account, an awkward one, but the two remain close, and Sung-min has since asked several pointed questions before offering financial advice to anyone else in the family.

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