Businesses in Canada can generally claim input tax credits to recover the Goods and Services Tax (GST) or the Harmonized Sales Tax (HST) incurred in the course of a ‘commercial activity’. Companies that paid the GST/HST may be eligible to claim credits which reduce their total taxes due. Learn more about these credits and find out if you can claim them on your next tax return. Jeremy Scott Law can also help you determine whether you qualify for ITCs or other credits. Schedule a consultation by calling (902) 403-7201.
What Is Input Tax?
The federal GST is a 5% tax on most goods and services supplied within Canada. Several provinces have combined their sales taxes with the GST, creating the HST which is currently 13% in Ontario, and 15% in Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland. Generally, businesses must collect the taxes and send them to the Canada Revenue Agency. Businesses that are required to register for and collect GST/HST are often also entitled to claim input tax credits to recover the GST/HST they have paid.
Businesses must collect, report, and remit GST/HST to the Canada Revenue Agency. Any business that is registered for and collects GST/HST will have to file a tax return. Those returns may be required to be filed annually, quarterly or monthly depending upon the size of the business. Typically, businesses that are required to collect GST/HST will also be eligible to claim input tax credits (ITCs). ITCs are the sum of the GST/HST that has been paid for legitimate expenses by the business in the course of its commercial activity.
How Do I Qualify for the Input Tax Credit?
If someone wants to claim ITCs, they must be registered to collect the GST/HST to claim these tax credits. Once a business is registered, they must track all of the eligible GST/HST expenses, especially when making any business-related purchases for goods and services. The business must record all those expenses so they can claim the costs in the GST/HST tax return. Companies must keep all documentation, such as related receipts, contracts, business papers, and invoices, to back up the claims for the tax credits.
Additionally, there are other qualifications for ITCs. Businesses must have purchased, imported, or bought goods in a participating province for use, consumption, or as a supply for normal business activities. Along with that, input tax credits only apply to those who have paid GST/HST on those services and goods. Determining ITCs can be challenging for any business tax return. Jeremy Scott Law can shift through the complexity of these credits to help you get the most deductions on your tax returns.
Note: Organizations that are involved in some taxable activities (known as commercial activities) and some tax exempt activities, may still be entitled to claim partial input tax credits. Jeremy Scott Law can help see whether your business is eligible for an input tax credit. Schedule a consultation by calling (902) 403-7201.
Claiming ITCs on Your Tax Return
The Canada Revenue Agency outlines a few of the expenses that individuals and businesses can claim as input tax credits. Companies can only claim ITCs if those goods and services are related to business activities. Also, these expenses must be reasonable in costs, quality, and nature. Businesses cannot claim ITCs on any purchases made for personal use. Before claiming credits, the company must have paid the GST/HST on these items. Qualifying purchases and expenses include:
- Accounting, legal, and professional fees
- Advertising-related expenses, such as flyers, ads, and business cards
- Commercial rent
- Equipment rentals
- Home office expenses
- Office expenses, such as computers, pens, postage, and other supplies
- Motor vehicle expenses
- Travel costs, such as car rentals, airfare, and hotel
Capital expenses may also qualify for input tax credits, such as:
- Capital property
- Machinery and vehicles
- Improvement costs to capital property
What Are Non-Qualifying Expenses?
As previously mentioned, any services or goods purchased for personal enjoyment or use are non-qualified expenses and are not eligible for ITCs. However, some other goods and services are not eligible for ITCs; they include:
- Expenses not relating to a commercial activity;
- Membership dues and fees for clubs or organizations that have a primary purpose of dining, recreation, or sporting activities. These organizations can include hunting, fishing, fitness, and golf clubs.
- Taxable goods and services that were bought with a tax exemption.
Are There Time Limits for Claiming ITCs?
Businesses will want to act quickly to claim these input tax credits. The tax legislation generally has a limitation of four years to claim these tax credits. Some organizations have an even shorter time frame. For example, a two-year limit applies to certain financial institutions.
Schedule a Consultation with a Canadian Tax Lawyer
These input tax credits are a vital part of Canada’s tax system. With them, businesses can get money back on their corporate expenses and regain a part of their working capital. All qualified ITCs will help to reduce the amount of taxes owed at the end of the year. However, there are a few caveats. ITCs are only eligible to businesses that have paid GST/HST for goods and services required to do business in the country. Any goods and services for personal use are non-qualified expenses. The Canada Revenue Agency does required documentation in the form of receipts, invoices, and other records. Determining eligibility for ITCs may be complicated for most businesses. Jeremy Scott Law can help see whether your business is eligible for an input tax credit. Schedule a consultation by calling (902) 403-7201.