Claiming GST/HST Input Tax Credits

The typical Canadian company makes numerous expenditures each year, and they may end up paying a significant amount of GST/HST on these purchases. There are countless examples to consider, and these costs can be as varied as the number of businesses in Canada. One company might pay GST/HST on fuel costs while transporting products. Another company might incur GST/HST while paying for the services of a subcontractor. In the majority of these situations, companies can claim input tax credits for the GST/HST paid on these expenditures. These tax credits can boost profit margins and lower tax bills at the end of the fiscal year. When can a company claim these tax credits? Are there any expenses that are not eligible? Interested parties may choose to ask these questions during consultations with Canadian tax lawyers. Consider calling (902) 403-7201 to discuss a potential consultation with Jeremy Scott Law. 

What Is GST/HST in Canada?

GST stands for “goods and services tax,” while HST stands for “harmonized sales tax.” There is also a third type of sales tax in Canada called PST or “provincial sales tax.” However, not all Canadian provinces and territories implement the same taxes. Some provinces have both GST and PST, including British Columbia, Manitoba, and Saskatchewan. Others combine both of these taxes into a single harmonized sales tax, including New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island. There are also a few with only GST and no provincial sales tax, including Alberta, the Northwest Territories, Nunavut, and the Yukon. Finally, Quebec has its own unique system with GST and QST (Quebec sales tax). 

GST is collected by the federal government, while PST and QST are collected by individual provinces. The former funds federal projects, while the latter helps fund provincial projects. The total sales tax rate for each province and territory varies tremendously. The Retail Council of Canada notes that on the low end of the scale, provinces like Alberta and Nunavut have total sales taxes of just 5%. On the other hand, provinces like New Brunswick and Nova Scotia have sales taxes of 15%. 

How to Claim GST/HST Input Tax Credits

According to the Canada Revenue Agency (CRA), companies can claim input tax credits (ITC) on GST/HST paid on goods or services related to commercial activities. The CRA also notes that companies can claim input tax credits that are “owed,” even if not yet paid. A company can claim these credits whether the goods or services were acquired, imported, or transported into a participating province. To claim ITC, companies must use, consume, or supply these goods and services during the course of their commercial activities. Companies base their ITC calculations on totals reported on line 108 of form GST34 and form GST62. 

A key requirement when making these claims is documentary evidence. In other words, Canadian companies must prove that they actually paid the GST/HST. In addition to proving that these expenditures occurred, companies may also need to establish that the expenses were business-related. This supporting documentation may include invoices, receipts, debt notes, and contracts. Even after successfully claiming input tax credits, companies should keep the related supporting documentation for six years. If a company loses the supporting documentation within this six-year period, issues could arise if the CRA requests it during later audits. To discuss proper record-keeping processes in more detail, consider a consultation with Jeremy Scott Law. 

Are My Business Expenses Eligible for Input Tax Credits?

Some business expenses are more straightforward than others. For example, a Canadian business might purchase lumber in order to construct a finished product. In this case, the lumber was obviously solely for commercial activities. However, other situations may not be so clear. As more independent contractors begin to work from home, complex questions are beginning to arise over the eligibility of home office expenses. A business might operate in an office within the Canadian condo of the owner, for example. 

In this situation, the company may be eligible to claim certain input tax credits but not others. For example, the mortgage on a residential property is not a business expense, but a percentage of the interest could be. The same logic applies to a percentage of the GST/HST incurred on internet, electricity, and other utilities. Often, the specific percentage is calculated based on the square footage of the home office in relation to the square footage of the entire residence. This is just one example of a situation in which input tax credits can become quite complex. 

Do I Claim GST/HST Input Tax Credits for US Expenses?

If a Canadian business incurs US business expenses, there are no GST/HST requirements. For example, a Canadian company might purchase supplies in the United States before transporting them across the border for manufacturing needs. Alternatively, a Canadian company might hire a digital contractor based in the United States. In both of these situations, claiming input tax credits would be impossible because there are no GST/HST taxes in the United States. However, a company can claim the net business expense incurred in the United States as a tax deduction – including the specific sales tax of the State. For example, a company based in British Columbia might incur a sales tax of 6.5% after making business-related purchases in Washington. 

The same is also true in reverse. For example, a Canadian digital freelancer might offer services to US-based companies. The freelancer is not required to charge GST/HST on their services, and they do not need to file a GST/HST return at the end of the year. Although this might seem like an oversimplification of a potentially complex tax situation, the United States and Canada intentionally streamline this process with a tax treaty. As a general rule, GST/HST only applies to transactions involving Canadian end consumers (including companies) within Canada. 

Contact Jeremy Scott Law for More Information

Although it might seem straightforward to claim GST/HST input tax credits, the process can be more complex than some realize. Aside from claiming these GST/HST credits, an obvious goal is to maximize potential benefits. A company may be eligible for higher tax credits than initial calculations indicate. An experienced Canadian tax lawyer can assist with these calculations and processes, and it may be worth consulting with one. Consider calling Jeremy Scott Law at (902) 403-7201 to learn more about all tax credits available for Canadian businesses.