Preparing Taxes 101: Claiming GST / HST

How to ensure that your expenses are eligible

Eligible expenses under the ITC generally include:

• Business start-up costs
• Legal, accounting, and other professional fees
• Office expenses
• Rent

An ITC cannot be claimed on certain capital property, taxable supplies acquired to make exempt supplies, and certain membership fees or dues. Additionally, an ITC cannot be claimed on certain property or services acquired or imported for personal consumption.

For example, a full ITC is recoverable by the GST/HST registrant where operating expenses or real property were acquired for use, consumption, or supply exclusively (i.e., 90 percent or more) in commercial activities.

However, in some situations where the supply was acquired only partly for use, consumption, or supply in commercial activities, the ITC is available only to the extent of that commercial activity.

Capital personal property is generally tied to a primary use (50 percent use) in determining eligible ITCs. For example, if equipment is used 50 percent of the time or more in taxable activities, a full ITC is claimed (no prorating required). Otherwise, no ITC is eligible at all.

Essentially, the ITC is available only for the consumption or use in making the taxable supplies where a GST/HST registrant is involved in making both taxable and exempt (from GST/HST) supplies. An ITC cannot be claimed on taxable supplies related to making exempt supplies.

Once the amount of the ITC is determined, it is subtracted from the GST/HST collected or collectible during a reporting period. The result of this calculation is the net tax (payable or refund) for the registrant’s reporting period.

Who can claim the ITC?

Only the named recipient of the supply is entitled to claim an ITC. For GST/HST purposes, the recipient is generally the person who is legally liable to pay for the supply. One of the most common reasons the Canada Revenue Agency (CRA) denies an ITC in a GST/HST audit is because the ITC is claimed by a person other than the named recipient.

A common example is where GST/HST-eligible supplies are bought by one company but shipped to another. Company A may have purchased goods from a supplier under a purchase and sale agreement. The supplier issued the invoice to Company A with a “ship to” address of Company B. Company B received the goods, paid the invoice to the supplier, and claimed the ITC.

The CRA denied the claim on audit because Company B was not listed on the invoice of the goods — and therefore, it was not entitled to claim the ITC.

However, there are exceptions to the above scenario. For example, there could be an agreement between these two companies, whereby Company B appoints Company A as their authorized agent or representative to be the named person on purchase invoices. In that case, Company B, the principal, would be entitled to claim the ITC because agents cannot claim ITCs — only principals can.

The GST/HST registrant must have sufficient documentary evidence to support the claim, as outlined above, to claim an ITC. Supporting documentation may include:

• Invoices
• Receipts
• Debt notes
• Written contracts or agreements

Supporting documentation must be kept for a period of six years from the end of the last year to which they relate.

The prescribed information requirement on the supporting documentation also depends on the total amount paid or payable as shown in the chart below.

Businesses generally have up to four years to claim the ITC after the due date for the return in which they could have first claimed the ITC. Certain financial institutions and some businesses with more than $6 million in sales have up to two years to claim the ITC.