As a new GST/HST registrant, it is important that you understand the importance and mechanics of claiming input tax credits (ITC) as part of the GST/HST reporting process. ITCs can greatly reduce the amount of GST/HST that you remit to the Canada Revenue Agency (CRA).
The GST/HST is a value added tax with the final end-user bearing the tax burden on the good or service consumed. To ensure this tax is not added to the cost of production, GST/HST registrants are generally allowed to claim an ITC on all GST/HST paid in the course of commercial activities. This ensures that any GST/HST paid in the provision of goods and/or services will be recovered. The ITC is claimed on the GST/HST return as a reduction of GST/HST collected during the period with the net amount being remitted to CRA or refunded from CRA if ITCs exceed GST/HST collected.
Generally, ITCs may be claimed by a registrant on GST/HST paid on property and/or services acquired in the course of commercial activities provided that the registrant is the recipient of the supply, sufficient documentary evidence has been obtained to substantiate the ITC claim, the GST/HST is payable by the registrant, and certain time limitations have been met.
The provision of property and/or services in the course of commercial activities includes business activities except for exempt supplies and services. The provision of this property and/or service is referred to as taxable supplies. Exempt supplies and services are itemized in Schedule V of the Excise Tax Act and are beyond the scope of this letter, however, we would be happy to discuss this subject matter with you in more detail should you require. If a registrant provides both taxable supplies and exempt supplies, an allocation of input tax credits between taxable supplies and exempt supplies will need to be done. Generally, CRA allows any form of apportionment provided it is fair and reasonable in the circumstances. For instance, if total sales are $100, however, taxable sales are $75 and exempt sales are $25, only 75% of the input tax credits should be claimed in that period. In addition to the above apportionment rule, if the property or service being purchased is used more than 90% in the production of a taxable supply, 100% of the input tax credit may be claimed and no apportionment is required. Any ITC apportioned to exempt supplies can be factored into expenses claimed for income tax purposes.
Documentary evidence is different depending on the dollar amounts, but generally, invoices for amounts greater than $150 must include the supplier’s name, GST/HST number, date, description of supply, total amount payable, terms of payment, the recipient of the supply, the tax status of each supply and the amount of GST/HST charged.
The timing of when ITCs are claimed is also important since ITCs will be disallowed if not claimed within the required time frames. Normally, an ITC needs to be claimed on or before the due date of the GST/HST return that ends within four years of the expense being incurred. In certain situations, such as a registrant (including taxable supplies of its associates) having taxable sales exceeding $6 million in its fiscal period, then the time frame is reduced to 2 years.
Although claiming ITCs may appear straight forward, complexities can and do arise in certain situations. This letter is meant as a general overview for claiming ITCs and not meant to address these complexities.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA