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Preparing Taxes 101: Claiming GST / HST

Preparing Taxes 101: Claiming GST / HST

Synopsis
5 Minute Read

Just because you file a GST / HST claim doesn't mean you'll get a refund. Find out what you need to know in this informative blog.

As the tax season approaches, 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. However, many businesses are unsure of what is required to support a GST / HST claim, in other words, what is eligible and what information is needed, and wind up not recovering costs.

In general, GST / HST should not be a cost to many businesses. Under the Excise Tax Act, the input tax credit (ITC) mechanism allows most businesses to recover the GST / HST paid or payable on eligible purchases and expenses related to their commercial activities.

Simply put, an ITC is the recovery of the GST / HST paid or payable.

Meet All Conditions

An ITC can be claimed if all of the following conditions are met:

  • The person claiming the tax credit is a GST / HST registrant during the reporting period in which the GST / HST was paid or became payable. It is important to note a registrant is a person who is registered for the GST / HST or is required to be registered.
  • The registrant acquired, imported or brought into a participating province property or services for consumption, use or supply in the course of their commercial activities. In very simple terms, 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.

Make Sure Expenses are Eligible

Eligible expenses under the ITC generally include business start-up costs, legal, accounting and other professional fees, office expenses, rent, etc. It should be noted an ITC cannot be claimed on certain capital property, taxable supplies acquired to make exempt supplies, certain membership fees or dues and property or services acquired or imported for personal consumption.

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

However, 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 or more in taxable activities, a full ITC is claimed (no prorating required). Otherwise, no ITC is eligible at all.

In other words, where a GST / HST registrant is involved in making both taxable and exempt (from GST / HST) supplies, the ITC is available only for the consumption or use in making the taxable 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 reporting period of the registrant.

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. This is important to note as one of the most common reasons the Canada Revenue Agency (CRA) denies an ITC in a GST / HST audit is that 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 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.

On audit, the CRA denied the claim because Company B was not the recipient of the goods and therefore, it was not entitled to claim the ITC.

Once exception to the above scenario could be if there is an agreement between Company A and Company B, 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.

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

  • Invoices
  • Receipt
  • Debt Notes
  • Written Contract, 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 amount paid or payable is less than $30  Total amount paid or payable $30 or more, less than $150 Total amount paid or payable $150 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
 
 ✔  ✔  ✔
 Supplier or intermediary’s GST / HST
registration number
   ✔
 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
 
   ✔ ✔  
Recipient’s name or trading name or name of recipient’s agent or authorized representative
 
     ✔
Terms of payment
 
     ✔
Brief description of each property or service sufficient to identify it
 
     ✔

In general, businesses 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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