Input Tax Credits in Canada

Sep 11, 2023

Input tax credits (ITCs) refer to credits that certain businesses in Canada can request for the sales taxes they paid on purchases made to create their products and services.

If you pay the goods and services tax (GST) or harmonized sales tax (HST) for your business-related goods or services, you might qualify for claiming a portion of these taxes as credits, resulting in a reduction in your overall tax liability. Discover additional information on ITCs and the process of claiming them on your Canadian tax declaration.


What Are Input Tax Credits?

If you operate a Canadian business, you are required to collect and submit the GST/HST, along with provincial sales taxes (PST) in certain regions. However, there is a possibility of offsetting some of the amount you need to submit by using Input Tax Credits (ITCs).

ITCs represent the total of the GST/HST you have paid for legitimate business expenditures or the allowable portion of the GST/HST paid. When you file your business’ tax return with the Canada Revenue Agency (CRA), ITCs serve as a means to recover the GST/HST amount spent on purchases and expenses related to your business activities.


How Input Tax Credits Work in Canada

To be eligible to receive input tax credits, it is necessary for you to be registered for the GST/HST. Once you have completed the registration process, it becomes important for you to keep a record of all the GST/HST expenses that qualify when you make a business-related purchase. This record will enable you to claim these expenses on your GST/HST return. It is crucial to retain all relevant receipts as proof for your claims, if required.

In order to be eligible for ITCs, it is imperative that you have procured, imported, or obtained goods for consumption, use, or supply in a participating Canadian province during your regular business activities. Additionally, you must have paid the applicable GST/HST on these goods.

Furthermore, there is a specific timeframe within which you can claim ITCs. Typically, businesses are required to claim ITCs within four years from the due date of the original return for which the credits are being claimed. However, for certain businesses with annual revenues exceeding $6 million and financial institutions, the deadline is two years.

When you submit your GST/HST return, you will need to include your input tax credits on line 108 (line 106 for paper filers) of the return. These credits will be subtracted from your final GST/HST balance that is owed.


What Qualifies for Input Tax Credits

According to the CRA’s website, you can request Input Tax Credits for various expenses, such as the following:

– Rent for commercial purposes
– Rent for equipment
– Expenses related to advertising (e.g., business cards, flyers, and advertisements)
– Fees for accounting, legal assistance, and other professional services
– Expenses for your home office and vehicle
– Office supplies (e.g., postage, computers, pens, and paper)
– Travel expenses (e.g., hotel, airfare, and car rentals)

Additionally, there is a list of capital expenses that are eligible for input tax credits, which includes:

– Capital assets
– Machinery and vehicles
– Furniture and appliances
– Improvements to capital assets

If you have paid GST/HST on any of these items, you may qualify for input tax credits. The CRA’s website provides a complete list of eligible items.

Note that you can only claim Input Tax Credits for goods and services that are directly connected to your business. The CRA specifies that the purchase or expense should be reasonable in terms of quality, nature, and cost.


Nonqualifying Expenses

When purchasing goods and services for your personal use or enjoyment, they do not qualify for Input Tax Credits (ITCs). There are other expenses and purchases that are also ineligible for ITC claims, including:

– Taxable goods and services bought or imported specifically to provide exempt goods and services.
– Certain capital property.
– Membership fees or dues for clubs primarily focused on recreation, dining, or sporting facilities (such as fitness clubs, golf clubs, hunting and fishing clubs), unless you acquire the memberships for the purpose of resale in your business.

To summarize:

– ITCs are credits that Canadian businesses can claim for the GST/HST they paid on goods and services necessary for conducting their business.
– Personal purchases are not eligible for ITC claims.
– You can make ITC claims when you file your GST/HST return, but it is crucial to maintain proper records to support your claims.
– Qualified ITCs will reduce the amount of GST/HST you are required to remit.

Need more information? CBES is here to assist you; feel free to contact us for expert guidance.




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