Preparing Taxes 101: Claiming GST / HST
Preparing Taxes 101: Claiming GST / HST
The input tax credit (ITC) enables your business to recover the GST/HST paid or payable on purchases and expenses for its commercial activities. However, many businesses are not sure what is required to support a GST/HST claim — and risk not recovering these costs.
In this article, MNP’s Tax Services team explains:
- How to meet all conditions for an ITC
- How to ensure that your expenses are eligible
- Who can claim the ITC
We have also provided a checklist to help your business understand the GST/HST prescribed information required for ITC claims.
Understanding how to claim credits under Canada’s sales tax regimes will help you stay ahead of the game and boost your business’ bottom line as the tax season approaches. However, many businesses are not sure of what is required to support a GST/HST claim — including what is eligible and what information is needed. This puts these businesses at risk of not recovering costs.
GST/HST should not generally be a cost to many businesses. Most registered businesses are able to recover the GST/HST paid or payable on eligible purchases and expenses related to commercial activities through the input tax credit (ITC) mechanism. Essentially, an ITC is the recovery of the GST/HST paid or payable.
We’ve summarized the conditions your business must meet to claim an ITC and which expenses are eligible. This article also examines who can claim the ITC and includes a checklist to help you navigate the process.
How to meet all conditions to claim an ITC
Businesses can claim an ITC if all the following conditions are met:
- The person claiming the tax credit is a registrant and is registered for GST/HST during the reporting period in which the GST/HST was paid or became payable. It is important to note that a registrant is a person who is registered for the GST/HST or who is required to be registered.
- The registrant acquired, imported, or brought property or services into a participating province for consumption, use, or supply in the course of their commercial activities. Commercial activity generally means making of taxable supplies.
- The GST/HST must have been paid or payable by the registrant in respect of the supply, importation, or bringing in of the property or services.
- The registrant has sufficient documentary evidence (discussed below) to support the ITC when making the claim in a GST/HST return.
- The ITCs are claimed within the time limit, typically up to four years, and the purchases and expenses are reasonable in relation to the nature of the business.
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.
| GST / HST Prescribed Information for ITC Claims | Total sales under $100 | Total sales of $100 to $499.99 | Total sales of $500 or more |
|---|---|---|---|
| Supplier or intermediary’s name, or the name under which it does business, i.e. trading name. |
✔ | ✔ | ✔ |
| Date of invoice or, where no invoice is issued, date tax is paid or payable | ✔ | ✔ | ✔ |
| Total amount paid or payable for all supplies | ✔ | ✔ | ✔ |
| Amount of tax paid or payable re each or all supplies, or a statement GST / HST is included in amount paid or payable for each taxable supply, including tax rate | ✔ | ✔ | |
| Indication of status of each supply where invoice includes bot taxable and exempt supplies | ✔ |
✔ | |
| Supplier or intermediary’s GST/HST registration number | ✔ |
✔ | |
|
Buyer’s name or trading name, or name of buyer’s agent or authorized representative
|
✔ | ||
| Brief description of each property or service sufficient to identify it | ✔ | ||
| Terms of payment |
✔ |
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.
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