GST/HST Input Tax Credits for First Nations Businesses
In Canada, First Nations businesses often face unique challenges when it comes to managing taxes like the Goods and Services Tax (GST) and Harmonized Sales Tax (HST). These challenges stem from the complexities surrounding tax exemptions and entitlements under the Indian Act, RSC 1985, c I-5. However, the Canadian tax system provides specific relief mechanisms, such as Input Tax Credits (ITCs), that can help First Nations businesses reduce their tax burden.
An Input Tax Credit (ITC) is a tax credit available to GST/HST registrants that allows businesses to recover the GST/HST paid on purchases made for their commercial activities. Essentially, ITCs ensure that businesses don’t bear the cost of GST/HST on goods and services they buy for resale or for use in the operation of their business. Instead, these taxes are refunded or credited back, reducing the overall cost of doing business.
Under the Indian Act, First Nations and their members are exempt from paying GST/HST on most goods and services purchased on a reserve. However, when First Nations businesses are involved in taxable commercial activities, the situation becomes more nuanced.
There are two primary considerations for First Nations businesses when it comes to GST/HST:
- Exemptions for First Nations Members: Goods and services purchased by First Nations individuals on reserve are generally exempt from GST/HST. This includes personal purchases such as food, clothing, and household items. The exemption also extends to certain purchases by First Nations governments and bands.
- Taxable Sales by First Nations Businesses: When a First Nations business sells goods or services to non-Indigenous customers (i.e., outside the reserve), GST/HST applies to those transactions. In this case, the business must charge GST/HST on taxable sales and may be eligible to claim ITCs on the tax it paid on business-related purchases.
For First Nations businesses, understanding the distinction between exempt and taxable sales is essential for navigating GST/HST obligations and maximizing ITC claims.
To claim ITCs, First Nations businesses must be registered for GST/HST and meet specific criteria. Below is an overview of how First Nations businesses can claim ITCs:
- Register for GST/HST
To claim ITCs, a business must be registered for GST/HST with the Canada Revenue Agency (CRA). Even if a First Nations business operates on a reserve and sells exclusively to Indigenous customers (who are generally exempt from GST/HST), it may still need to register if it engages in taxable activities, such as selling to non-Indigenous customers or providing taxable services.
Exemptions for Small Businesses: Small businesses with taxable revenues under a certain threshold (currently $30,000 annually) may not be required to register for GST/HST, but they can choose to do so voluntarily to take advantage of ITC claims.
2. Determine Eligible Purchases
ITCs can only be claimed for GST/HST paid on purchases that are used in a business’s commercial activities. This includes goods, services, and capital property (like equipment or inventory) acquired for business purposes. For First Nations businesses, the following types of purchases may be eligible for ITC claims:
Capital Property: Such as machinery, equipment, and vehicles purchased for use in business operations.
Operating Expenses: Items like office supplies, inventory for resale, and utilities.
Professional Services: Fees for services such as accounting, legal advice, and consulting related to business activities.
First Nations businesses face unique tax treatment under Canadian law, particularly regarding their operations on reserves.
- Purchases Made on Reserve
If a First Nations business makes purchases directly on a reserve, those purchases may be exempt from GST/HST, depending on the nature of the transaction. However, if the goods are purchased outside the reserve (or the business sells goods outside the reserve), the business may need to pay GST/HST and claim ITCs on those purchases.
2. Services Provided to Non-Indigenous Clients
When a First Nations business provides taxable services (such as consulting or construction) to non-Indigenous clients outside the reserve, it is required to charge GST/HST on the service. In such cases, the business can claim ITCs for any GST/HST paid on related expenses, such as office supplies or contractor services.
3. Exemptions for Governmental and Band Purchases
Goods and services purchased by First Nations governments and bands are generally exempt from GST/HST when used for governmental activities. However, these organizations may not be able to claim ITCs on these exempt purchases. First Nations businesses should understand the distinction between business activities and governmental activities, as ITCs can only be claimed on taxable commercial purchases, not on exempt governmental purchases.
How SpenceDrake Tax Law Can Help
At SpenceDrake Tax Law, our Tax Lawyers assist individuals and businesses with determining their tax obligations. If you require assistance contact us today for a consultation.
SpenceDrake Tax Lawyers
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.