Input Tax Credit
What is an Input Tax Credit for GST / HST?
Input Tax Credits (“ITC”) can be claimed to recover the GST/HST paid on business expenses. In general, a business can receive a refund for the GST/HST paid on business expenses by claiming the matching ITCs.
A business has to register a GST/HST account with CRA once revenue exceeds $30,000 in a 12-month period. And a GST/HST account is necessary to claim ITCs. Registration for HST/GST is compulsory for most businesses but not for “small suppliers”. However, a small supplier can choose to register and in turn receive ITCs for the GST/HST remitted on business expenses.
For a business to claim Input Tax Credits, it must track all HST/GST paid on related business expenses and purchases. If CRA audits an ITC claim they require detailed and specific evidence (e.g. receipts, invoices) to substantiate the claim. Without adequate documentation the ITCs will be denied and CRA will likely add financial penalties. In that case, an expertly prepared Notice of Objection will be necessary to reverse CRA’s position.
What Business Expenses are Eligible?
The conditions for businesses to claim Input Tax Credits include:
The acquisition, importation, or bringing into a participating province services or property for use, supply, or consumption during business/commercial activity;
A GST/HST account registered with CRA by the business for the respective period;
The business paid the GST/HST or it is payable;
The business claimed the ITCs within the deadlines; and
There is supporting documentation to substantiate the ITC claim.
Expenses that may qualify for the ITC include:
Rentals of Equipment;
Rent;
Professional fees such as for accounting and legal;
Marketing expenses;
Vehicle expenses;
Office expenses; and
Travel expenses.
Certain capital expenses also qualify, including:
Most capital property;
Appliances and Furniture;
Machinery and Vehicles; and
Enhancements to capital property.
In general, to claim an Input Tax Credit, the expense has to relate to the business and be considered reasonable.
Supporting Documentation
Supporting documentation is key to an ITC claim. Invoices below $30.00 must indicate the:
Supplier’s trading or business name;
Invoice date or date payable; and
Total payable.
Invoice amounts ranging between $30.00 and $149.99 must also indicate:
Total GST/HST;
Status of supply where invoice includes both taxable and exempt supplies; and
The GST/HST number of intermediary or supplier.
Invoices exceeding $150.00 must include all of the previous information, plus:
Trade name, name, or authorized agent/representative’s name;
Goods and services description; and
Terms of payment.
What Expenses Do Not Qualify?
Common expenses that do not qualify for the ITC include:
Goods and services (taxable) imported or bought to provide or make exempt goods and services;
Select capital property;
Club dues or fees paid to an entity whose main purpose is to provide dining, recreation, or sporting facilities/actvities, except if those memberships have been acquired for resale purposes.
Of course, if CRA reviews your Input Tax Credit claim and you do not have sufficient supporting documentation, it may be denied and penalized.
When is the Deadline to Claim Input Tax Credits?
If you do not claim your ITCs when you file your GST/HST returns you have additional time to do so. Smaller businesses can do so within 4 years from when the ITC could have initially been claimed.
The deadline to claim Input Tax Credits is 2 years for most listed financial institutions and businesses exceeding $6 million in sales (taxable) for the two prior years.
How to Calculate Input Tax Credits
For most expenses, the method to calculate the Input Tax Credit is to add up the GST/HST paid or payable for each expense related to goods or services acquired, imported, or bought into a participating province. Then this amount is multiplied by the ITC eligibility percentage. To find out how much in Input Tax Credits is claimable, you need to know the ITC eligibility for each expense. Calculating this can be difficult, as the percentage that a business is able to claim as an Input Tax Credit on expenses varies. For certain expenses, there are also limits on the amounts businesses may claim.
For example, when an expense is 90% utilized for commercial/business activity, most businesses can claim 100% of the ITC. If the expense is utilized less than 10%, it cannot be claimed. When the expense is used for commercial activities less than 90% but above 10% of the time that the calculation can become complex.
In these circumstances, the ITC eligibility is whatever the percentage of the expense’s use for commercial activities is determined to be. An operating expense that is used for commercial purposes 35% of the time, for example, means that 35% of the HST/GST paid or payable for the good or service can be claimed as an ITC. An expense used for commercial purposes 60% of the time means that 60% of the HST/GST can be claimed.
Therefore, if a business purchased a chair for $1000.00, paid $130.00 in HST, and used the chair for business purposes 50% of the time, then you would multiply $130.00 by 50% to arrive at $65.00 that could be claimed as an ITC. However, this is not the case for all businesses as certain types of organizations are entitled to claim different percentages.
The ITC eligibility percentage is also calculated differently when it is applied to meal and entertainment expenses that relate to commercial activities. Most businesses may claim 50% of reasonable expenses, long-haul truck drivers are allowed to claim 80%, and charities and public institutions can claim 100% of reasonable expenses.
Input Tax Credits are complicated. Even more so when CRA denies your valid ITC claim. Contact us to challenge CRA’s position.
SpenceDrake Tax Law