An input tax credit, or ITC, is the GST/HST you paid on a business purchase that you claim back from the CRA on your GST/HST return. Once you are registered for GST/HST, you net the tax you collected from clients against the tax you paid on business costs, and remit or recover the difference. The catch is documentation: the CRA sets out exactly what each receipt must show before the credit is allowed, and the bar rises with the size of the purchase.
How ITCs work
When you are registered, every GST/HST return has two sides. On one side is the tax you charged clients. On the other is the tax you paid on business-use purchases: materials, tools, equipment, subcontractor invoices, fuel, software and the business share of mixed-use costs. You subtract your input tax credits from the tax you collected. If you collected more than you paid, you remit the difference. If you paid more, for example after buying a van, the CRA refunds the excess. This is the regular method, and it is the default for a registered business that has not elected the Quick Method.
What you can claim a credit on
- Materials and supplies used in the work
- Tools and equipment (the GST/HST portion; the asset cost itself is handled through capital cost allowance)
- Subcontractor invoices that show GST/HST
- The business-use percentage of mixed costs such as a phone bill or a vehicle used for both work and personal trips
- Fuel, insurance and repairs on a work vehicle, pro-rated for business use
You cannot claim a credit on a purchase with no GST/HST on it, on the personal share of a mixed-use cost, or on most client meals and entertainment beyond the allowed portion.
The documentary requirements (the part people get wrong)
The CRA sets three tiers of information your records must show, based on the amount of the sale including tax:
- Under $100: you need the supplier's name or trading name, the date, and the total amount paid.
- $100 to under $500: all of the above, plus the supplier's GST/HST registration number, and either the amount of GST/HST or a statement that the total includes it.
- $500 or more: all of the above, plus your name or trading name, a brief description of what was supplied, and the terms of the sale.
A till slip that does not show the supplier's GST/HST number on a $300 purchase does not support the credit. The number lets the CRA confirm the supplier is actually registered. If you cannot back up a credit to this standard, the CRA can deny it on audit.
Records and timing
Keep every invoice, receipt and statement that supports a credit for six years from the end of the tax year it relates to. You generally have up to four years to claim a credit you missed, so a forgotten invoice is not always lost, but the cleaner approach is to claim as you go. File your GST/HST return for each reporting period and reconcile the credits to your bookkeeping.
Common mistakes
- Missing GST/HST numbers on receipts. The single most common reason a credit is denied. For anything $100 or more, the supplier's registration number must be on the document.
- Claiming the personal share. A phone or vehicle used half for personal life supports a credit only on the business portion. Claiming the whole thing is a classic audit flag.
- Claiming credits on the Quick Method. If you elected the Quick Method, you generally cannot claim ITCs on operating costs. Mixing the two methods is an error.
- Throwing out receipts. No document, no credit. The six-year rule is not optional.
- Double-counting GST/HST as an expense. The tax you reclaim as a credit is not also a deductible business expense. Pick one treatment, not both.
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