If you are running a business here in Canada and you are registered for GST/HST, you can claim back the sales tax paid on business purchases. This can be accomplished using the Input Tax Credit.
What is Input Tax Credit?
Input tax credit, or ITC, is a sales tax that businesses can claim to recover the GST/HST paid on eligible business purchases. This can be done only in the case of those used for or consumed in the course of commercial activities. In other words, GST/HST paid on purchases relating to personal use cannot be recovered.
These business purchases include gasoline, telephone, repairs, and the purchase of any capital equipment, such as machinery or delivery equipment. ITC is subtracted from the total of all GST/HST collected during the reporting period. The difference between the amount of GST/HST collected on sales and the ITC you claimed, will be your net tax.
What happens if you forgot to claim ITC?
Sometimes after the GST/HST return is filed, the business owner realizes he forgot to claim an ITC that should have been claimed. The good news is that you can claim missed ITC on a future GST/HST return, and you have a 4-year window to do that. So there’s no need to go back and adjust the return that was filed, because you can claim the money back in the next reporting period.
Are there any restrictions?
There are a few restrictions on claiming ITC. As previously mentioned, you can only claim ITCs to the extent that your purchases and expenses were strictly for use in your commercial activities. Also, the expense has to be reasonable in quality, nature, and cost in relation to the nature of your business.
There are also restrictions depending on the type of business expenses you are claiming. Let’s go through a few of them:
Meals and entertainment
One of restrictions pertains to meals and entertainment. You can claim an ITC for GST/HST you paid on reasonable business meals and entertainment expenses, but only at 50% of the GST/HST paid.
The general rules for claiming ITC for capital assets are as follows: If you use the capital assets primarily (more than 50%) in your commercial activities, then you can claim full ITC. If you use the capital assets 50% or less in your commercial activities, you cannot claim any ITC. Capital assets include things such as office furniture, computers, machinery, equipment, and etc.
Let’s say you buy a computer for $2,000, plus GST. You intend to use the computer 70% for commercial activities and 30% for personal use. Since you’ll be using the computer for more than 50% of the time in your commercial activities, you can claim full ITC on the GST you’ve paid.
Home office expenses
This one is more rigorous. You can claim ITC for your home office expenses only if the work space is your principal place of business used to meet clients, customers, or patients. Also, most of the space (90% or more) has to be used to earn business income on a regular and continuous basis.
Support for ITC
In order for you to claim back sales tax paid on business purchases with ITC, you must have sufficient support. The CRA has very strict rules when it comes to the information required to be on the vendor’s sales invoice. If the invoices you have do not comply with the regulations, the ITC will be at risk of being denied. Check your invoices to see if you need to go back to your vendor and get the invoices fixed to make them comply with the requirements below.
|Information required||Under $30||$30 to $149.99||$150 or more|
|Vendor’s business or trading name||Yes||Yes||Yes|
|Date of invoice or, if no invoice issued, the date the tax was paid or will be made payable||Yes||Yes||Yes|
|Total amount paid or payable||Yes||Yes||Yes|
|An indication of the total amount of GST/HST charged at the applicable rate||No||Yes||Yes|
|An indication of which items are taxed at the GST/HST rate||No||Yes||Yes|
|The vendor’s business number||No||Yes||Yes|
|Your business name or trading name||No||No||Yes|
|A brief description of the goods or services||No||No||Yes|
|Terms of payment||No||No||Yes|
The above chart lists the general requirements based on the value of purchase. However, there are exceptions to the rule. Always check with your accountant to ensure your business meets all requirements to claim back sales tax paid on business purchases.