Anyone doing business in Canada is aware of the Harmonized Sales Tax (HST) and Goods and Services Tax (GST). While GST/HST is paid by the end consumer, the onus of collecting and remitting GST to the Canada Revenue Agency (CRA) lies with supply chain intermediaries. Let’s understand this with an example. Jack sells furniture, buying wood and paint and bearing the costs of logistics, advertising, and store rent. He pays GST to all these vendors. Later, he charges GST to the consumer he sells the furniture to and remits it to the CRA. To ensure GST is only paid by the end consumer, the CRA introduced the input tax credit (ITC).

How Does the Input Tax Credit Work?

ITCs are a method for small business owners like Jack to recover the GST/HST they paid to conduct their commercial activities, such as selling furniture. Let’s understand ITC with the above example of Jack.

  • First, Jack will have to pay his vendors for the goods and services he used to help him sell furniture. The vendors should be registered with GST and have charged GST/HST to Jack.
  • Jack will receive a GST invoice from his vendors that clearly states the names of both parties, their GST numbers, the invoice date, and the GST amount charged. He should keep these invoices and receipts safe.
  • Then Jack collects GST from his customers and files monthly or quarterly GST returns. At the end of the month/quarter, Jack will mention the GST collected from customers, deduct the GST paid to vendors, and remit the balance amount to the CRA. When deducting the GST paid, he must mention the GST number, invoice number, and invoice date. This amount he is deducting is called ITC.
  • Jack’s vendors should also file GST returns and remit the GST they collected from Jack to the CRA.
  • The CRA will receive GST from the vendors and an ITC claim from Jack. It will match the invoice number, date, amount, and name. If everything matches, the ITC claim will be approved.

This is broadly how ITC works. But GST and ITC get complicated as you add scenarios, exemptions, and business types, making ITC claims difficult.

If Jack collected $1,000 GST and paid $400 GST, he will remit $600 to the CRA. But what if Jack did not collect any GST from customers?

Can You Claim ITC Without Charging GST to the End Consumer?

There are multiple reasons a business may not collect GST. The business is not registered with GST, or it is supplying GST-exempt services such as legal aid and music lessons. In these scenarios, GST is not applicable, and therefore, the business owner cannot claim ITC.

However, there are some zero-rated goods, such as medical assistive devices, feminine hygiene products, and basic groceries, on which 0% GST/HST tax rate applies. Although no GST is collected by the business because of the 0% rate, it falls under the GST ecosystem, and the business can claim ITC on the GST it pays. So, if a grocery store pays for advertising, it can claim ITC on the GST charged by the advertising company. In such cases, the grocer may be eligible for an ITC refund.

While you can claim ITC for the expenses you incurred, when can you claim it?

When Can You Claim Input Tax Credit (ITC)?

Businesses can claim ITC within four years of the GST/HST return filing deadline for the reporting period in which the expense was incurred. For instance, Mickey runs a logistics company and buys a delivery van in November 2023, on which he paid $2,500 GST. He files quarterly GST returns, which brings the return filing deadline to January 31, 2024, for the reporting period October 1 to December 31, 2023. He has until January 31, 2028, to claim ITC for the $2,500. It means the van should earn him enough business in 4 years to collect $2,500 in GST from his customers.

Also, businesses cannot claim ITC for past expenses. The ITC claim is only for expenses incurred during or after the reporting period. For instance, you prepaid $1,200 GST on an annual subscription to a software on January 5, 2024, and registered with GST in October 2024. You cannot claim ITC for the GST paid on subscription from March to September 2024. However, you can claim ITC for the subscription from October to December 2024.

Retroactive Registration for GST/HST

There is a solution to claim ITC for past events; register with GST retroactively for previous periods. While you can claim ITC for past expenses, you must also pay GST for those years. Retroactive registration should be carefully thought through, and the GST amount calculated to ensure the ITC is significant.

It is for these ITC claims and refunds that businesses should register with GST even if they do not meet the $30,000 sales threshold. Businesses must register with GST once their sales exceed $30,000 in four consecutive calendar quarters or in a single calendar quarter.

Scenarios Where the CRA Could Reject an ITC Claim

While claiming ITC can be rewarding, it needs detailed record-keeping with adequate supporting documents. Any slip-up and the CRA could reject your ITC claim. Here are some common reasons why your claim could get rejected:

  • Inaccurate and Incomplete Invoices: Missing invoices, incorrect GST numbers, or incomplete details on the invoice, such as a missing or incorrect invoice number or the party’s name.
  • Mismatch between invoices: Mismatch in details, such as invoice numbers, dates, or taxable amounts.
  • Wrong ITC claimant: ITC claim filed by another person whose name is not on the invoice.
  • Delayed supplier returns: Any delay in filing returns on the supplier’s side or inaccuracies in their returns.
  • Supplier’s GST non-compliance: Supplier fails to remit the GST to the CRA.

Some serious issues, such as duplicate claims for the same ITCs or false statements to claim ITC, could lead to gross negligence penalties. Since GST is calculated on sales, claim rejections or penalties could amount to a significant sum.

The best way to prevent denied ITCs and gross negligence penalties is through strong record-keeping. A professional accountant is well-versed with the GST laws and CRA’s reporting requirements. They can help you stay GST-compliant and reduce your tax burden by claiming ITC where applicable.

Contact Black and Gill LLP in Toronto to Help You File GST Returns

A skilled accountant can help you plan, maintain proper documentation, reconcile purchase invoices with the supplier’s details, and regularly review their compliance with GST regulations to ensure eligibility for claiming ITC. To learn more about how Black and Gill LLP in Etobicoke can provide accounting and tax services, contact us online or call us at 416-477-7681.