What Are Input Tax Credits (GST Canada)?
A CRA Input Tax Credit (the “ITC”) is the sum or the allowable portion of the GST or HST paid on business-related expenses. A business, which can be all sorts of entities pursuant to subsection 123(1) of the Excise tax Act, is able to claim these ITCs on purchases and expenses that are for the use or supply of business activities.
For an expense to qualify for the HST or GST ITC, a business must be registered with the CRA for GST/HST purposes. Most Canadian businesses are registered, but some are not required to register. The Excise Tax Act stipulates that GST/HST registration is mandatory for all businesses except those that are deemed, small suppliers. A small supplier refers to most businesses that have a total taxable revenue of $30,000 or less, annually, although there are exceptions. However, even businesses that could qualify as the small suppliers may wish to register for GST/HST as this allows them to reclaim the GST/HST paid on business purchases and receive the ITCs. Businesses which exceeded the small supplier threshold become mandatory registrants, even if their total taxable revenue falls below the $30,000 threshold in subsequent years.
If your business wishes to claim an ITC, it’s important to track all GST/HST paid on business-related purchases or business-related expenses. It’s also crucial to keep all receipts, invoices, etc. to back up your claims. If the CRA wishes to verify your expenses, it will request all relevant documentation. Failing to provide the right documents could result in the agency disallowing your claim for ITCs, leaving you with a tax bill.
Properly claiming an ITC can be very important for a business. Most businesses have a lot of expenses and every dollar obviously matters. If there is an option that allows you to receive a tax credit for legitimate business expenses, it is something that most organizations will want to take advantage of. However, like all CRA processes, it’s crucial that they are handled correctly. The CRA has very strict rules and it requires that they be followed properly. Failing to have documentation, for instance, is an issue that that CRA will not take kindly to. Invoices must conform to the regulations, or risk being invalid under subsection 169(4) of the Excise Tax Act. If subcontracting taxable supplies, businesses must ensure that their subcontractors are registered for GST/HST purposes and check up on that status periodically. In the agency’s eyes, you must have proof to back up any and all of your ITC claims, and in certain situations, you may have to demonstrate you received the supplies for which you claim ITCs, and that you did your due diligence to ensure those suppliers were proper registrants for GST/HST purposes.
Another situation that the CRA takes very seriously is procedures and deadlines. The agency sets many rules on when certain documents need to be filed and when certain credits need to be claimed. If these deadlines are missed, there could be a potential issue. This is why many business owners find themselves asking “how far back can you claim GST?” or other similar questions.
While most business owners claim their ITCs when they file their GST/HST return, you are able to claim those that you did not claim when you filed the return for the corresponding period at a later date. This is possible as long as they are claimed by the due date of the return for the reporting period that ends within four years of the period in which they should have been claimed. However, in some situations and for some types of businesses, this time for claiming ITCs is reduced to two years.
For example, this is the case for certain listed financial institutions as well as those who have annual taxable supplies of more than $6 million for each of the two preceding years. In certain situations, back-dated GST/HST registrations are possible and even encouraged by the CRA, even if claiming the corresponding ITCs is no longer possible.
Qualified Expenses on the Input Tax Credit
GST/HST registrants may recover the GST/HST paid or owed on purchases and expenses related to commercial activities by claiming the Input Tax Credits. However, as with any CRA interactions, it’s important to understand which expenses qualify.
Otherwise, you could end up having the agency reassess your tax returns and disqualify you from claiming these credits. That would mean that you could potentially be faced with a large tax bill that you are not able to pay. This is obviously a situation that no one wants to be in. Therefore, it’s important to know which expenses qualify for the CRA Input Tax Credit.
The following expenses may be considered qualifying expenses for CRA Input Tax Credit:
- Equipment rentals;
- Rent paid for the business property;
- Accounting, legal, and other professional fees;
- Advertising-related expenses;
- Motor vehicle and home office expenses;
- Office expenses such as postage, computers, paper, etc.; and
- Hotels, airfare, car rentals, and other travel expenses.
Certain capital expenses also qualify, such as:
- Most capital property;
- Furniture and appliances;
- Vehicles and machinery; and
- Improvements to capital property.
It is also important to make sure that you are eligible to claim ITCs. Businesses may be able to claim them if:
- The company acquired, imported, or brought into a participating province property or services for consumption, use, or supply in the course of commercial activities;
- The business is a GST/HST registrant during the reporting period;
- The GST/HST has been paid or is payable by the business in terms of supply, importation, or bringing in of the property or services;
- The ITCs are claimed within the time limit; and
- Documentation is present to prove the ITC prior to making the claim.
Documentation is important whenever you are completing any CRA form or applying for any credit or deduction. The CRA may wish to investigate your claim and if you do not have the necessary documentation, the agency will likely reject your claim.
You are required to provide specific information on the receipts, contracts, invoices, and other business documents when providing taxable property and services, pursuant to subsection 169(4) of the Excise Tax Act and the corresponding GST/HST ITC regulations.
For invoices under $30, you must provide:
- The supplier’s business or trading name, or intermediary’s name;
- The date of the invoice or the date tax is payable (if no invoice was issued); and
- The total is payable.
For invoices between $30 and $149.99, you must provide the information listed above, as well as:
- The total amount of GST/HST charged;
- Details on which items are charged at the GST rate and which are charged at the HST rate; and
- The supplier or intermediary’s business number.
For invoices over $150, all of the above information must be provided as well as:
- Your name, trading name, or the name of the authorized agent or representative;
- A description of the goods and services; and
- The payment terms.
When claiming an HST or GST ITC, know that the claim must be related to the business and the purchase or expense must be reasonable in quality, cost, and nature. Having the necessary documentation can help support your claims should the CRA investigate. Keep these documents safe in case the CRA asks for them.
While all businesses will want to make sure that they claim the ITCs that they are entitled to claim, it is of course important to understand that not all expenses qualify. First of all, an expense must be a legitimate business expense. This means that goods and services that are purchased for personal use or enjoyment do not quality. However, this is not the only restriction. It is a common mistake to assume that absolutely every business expense can be claimed as an Input Tax Credit. This is untrue.
Certain purchases or expenses cannot be claimed as ITCs. Some of these non-qualifying expenses include:
- Taxable goods and services that are bought or imported to provide exempt goods and services.
- Exempt goods and services include used residential housing, medical and dental services, educational services, issuing insurance policies, financial services (such as bank fees) legal aid services, most goods and services provided by charities, and other such services);
- Certain capital property; and
- Membership fees or dues paid to a club that has the main purpose of providing dining, recreation, sporting facilities, unless your organization acquires the memberships to resell in the normal course of business. This includes memberships or fees paid to golf clubs, fitness clubs, and hunting and fishing clubs.
It is crucial that businesses have the correct documents to support their claims. Otherwise, even valid expenses could be rejected by the CRA. The agency is very strict with having the appropriate documentation when it is requested. While you may not be required to send in this documentation when filing your returns (especially if you are filing them online), the CRA may request to see these documents, especially if they are doing a tax reassessment. If the CRA requests proof to verify your purchases and you are unable to provide suitable documents, they will likely reject your claims. This could leave you on the hook for a large tax bill and, potentially, even costly penalties.
Keeping accurate records can be the difference between having your claims accepted by the CRA and having these claims rejected.
If you have an issue with the CRA rejecting HST or GST Input Tax Credit claims that you believe are valid, or if the CRA has rejected your claims and now you owe tax debt or penalties, please contact a tax lawyer. The tax laweyers are made up of legal, accounting, and ex-CRA professionals who understand what it takes to resolve tax problems. We have extensive experience successfully communicating and negotiating with the CRA.Efficient
Our team can review your situation, determine the best course of action to take, work with you to gather the documentation and evidence that you need to support your claims, and communicate and negotiate with the CRA on your behalf. Dealing with the CRA can be difficult and the agency has processes and procedures that are often complex and confusing. When you work with a trusted professional, you even the playing field and give yourself the best chance of successfully resolving your situation.
When it comes to the Canada Revenue Agency (CRA), it’s important to remember that deadlines are very important. This fact can be a major source of stress for both personal and business filing. If you don’t file everything on time, you may worry that you’ll miss something or that you could potentially have an issue with the CRA when it comes to assessment or reassessment. When these deadlines are met, the stress eventually dissipates, but if they are missed, you will often find yourself with lost money or worse, a tax debt.
Most GST/HST registrants claim their ITCs when they file their GST/HST return for the reporting period in which they made their purchases. This is the standard practice and, often, the most straightforward way of doing things. However, some registrants may have ITCs that were not claimed in their corresponding reporting period. This can happen if you neglected to claim these in the year they were purchased, if you did not realize that you could have claimed them if you lacked the right documentation at the time, and for many other reasons. Falling behind in claiming tax credits is not risk-free. If you’re wondering how far back you can claim GST or HST ITCs, know that the Excise Tax Act limits registrants to claim any unclaimed ITCs within four years after the end of the reporting period in which the ITC could have first been claimed.
For example, you are a quarterly filer, and your business purchases office furniture during the reporting period of October 1, 2018, to December 31, 2018, you can claim the CRA Input Tax Credit. The due date of the return for this reporting period is January 31, 2019. Most businesses will claim the ITC on this return.
However, the last reporting period in which you can claim an Input Tax Credit for the tax you were charged on the office furniture is the reporting period of October 1, 2022, to December 31, 2022. The due date for this return is January 31, 2023. This means that you can claim the ITC in any return filed by January 31, 2023.
It’s also important to note that the four-year deadline isn’t applicable to all types of businesses. The time limit for claiming ITCs is reduced to two years for most listed financial institutions as well as some businesses that have annual taxable sales of more than $6 million for each of the two preceding fiscal years (except for charities and persons whose supplies of goods and services – other than financial services – during either of the two preceding fiscal years are at least 90% taxable supplies).
Documentation is key when claiming ITCs. To support your claim for ITCs, the invoices or receipts you use must contain specific information. Poorly documented ITCs may lead to audit troubles down the road.
Failing to file ITC claims within the statutory deadline permanently disqualifies the taxpayer from claiming them. Don’t get stuck with interest and penalties because you got behind the deadline to file – schedule your quarterly filing with plenty of time to spare.
What Amount Can Be Claimed as an Input Tax Credit on the Company’s Next GST/HST Return?
A lot of people have questions about CRA policies, especially when it relates to ITCs. One of the most common questions is “how far back can you claim GST or HST ITCs?” as well as “how much can you claim?”
For most businesses, there is a four-year deadline to claim ITCs. In general, most businesses claim ITCs in the reporting period during which they made the purchases. For example, if you make a purchase during a reporting period that goes from the period of January 1, 2019, to September 30, 2019, the return due date for this reporting period is October 31, 2019. If you do not claim the CRA ITC on this return, you have until October 31, 2023, to do so.
To determine the amount that can be claimed as an ITC, you will need to figure out the eligibility percentage for that expense. This calculation can be complex, but it is important that it is followed correctly. There are different percentages of the amount of GST/HST payable that a business is able to claim as an ITC on most operating expenses related to commercial activities and there are restrictions on the amount that you can claim as an ITC on certain expenses.
For instance, if an operating expense is used for commercial activities 90% of the time or more, the ITC eligibility for most businesses is 100%. If the expense is used for commercial activities for more than 10% but 90% of the time, then the ITC eligibility will be the percentage of its use. For example, if an operating expense is used for commercial activities 75% of the time, then 75% of the GST/HST paid or payable for the property or service can be claimed as an Income Tax Credit. If the expense is used for commercial purposes 50% of the time, then 50% of the GST or HST can be claimed. In general, businesses can only claim ITCs for the part of the GST or HST paid that relates to business activities.
It is also important that the method used to determine the percentage is considered to be fair and reasonable by the CRA and that it is consistent throughout the year. Also, keep in mind that operating expenses that are used for commercial activities 10% of the time or less are not eligible to be claimed as ITCs.
Note that financial institutions must use 100% of an expense in commercial activities if they wish to claim a full ITC, but they can claim a partial ITC even in situations where less than 10% of an expense is used in commercial activities.
In addition, different calculations apply to the amount of GST/HST paid that can be claimed as an ITC on reasonable meals and entertainment expenses that relate to your commercial activities. Most businesses are able to claim 50% of these expenses, while charities and public institutions can claim 100%. Long-haul truck drives are permitted to claim 80%.
Remember that a business cannot claim an ITC on the GST/HST paid on memberships in clubs where the main purpose of which is to provide dining, sporting, or recreational facilities unless the membership or right to acquire a member is purchased exclusively for selling such memberships or rights in the ordinary course of business.
When you are dealing with CRA processes or working to ensure that your tax return is completed properly while still ensuring that you receive all of the tax credits that your business is entitled to, it can often be quite difficult to understand all of the rules and policies put in place by the CRA. The agency traditionally has a very strict set of rules that must be followed correctly, but these rules are often quite difficult for the average taxpayer to understand. However, getting your tax returns right is important. If you make an error, even a small one, the CRA could reject your claims when they reassess your return. They could even request an audit, which can be a lengthy and stressful process.
For most expenses, the way to calculate the ITC is to add up the GST or HST paid or payable for each expense of property or service acquired, imported, or bought into a participating province. Then this amount is multiplied by the ITC eligibility. As mentioned above, if an expense is used for commercial activities more than 90% of the time, most businesses are eligible to claim 100%. If the expense is used for commercial purposes between 10% and 90%, then the ITC eligibility is the percentage that it is used for commercial purposes. Expenses that are used for commercial purposes for 10% of the time or less are not eligible for most businesses.
Therefore, if a business purchased a computer for $2,000 and paid $260 in HST on the computer, this $260 would be multiplied by the percentage that the computer is used for business purposes. In this hypothetical situation, if the computer was used for business purposes 85% of the time, then the business would multiply $260 by 85% to arrive at $221. This would be the amount 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.
There are also different methods to calculate ITCs for meals and entertainment expenses. One method is to claim 50% of the actual GST or HST paid on such expenses during the reporting period. Using this method means you do not have to make any adjustments at the end of the fiscal year. Another method is to claim 100% of these expenses throughout the year and then adjust for the excess claimed during your first reporting period for the following fiscal year.
If the CRA has claimed that you did not properly calculate or claim an Input Tax Credit and is looking to reassess your return or potentially audit your business, you will want to have a professional on your side. The tax lawyers are made up of experienced legal, accounting, and former CRA employees who understand how to effectively negotiate and communicate with the agency. Making a mistake during the course of an investigation, reassessment, or audit can have serious consequences. Rather than struggle with complex CRA processes and difficult CRA agents, contact tax lawyers to solve your tax issue.
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