TL;DR
Input tax credits let GST/HST-registered businesses recover the sales tax they pay on eligible expenses. Most owners either under-claim because records are poor or over-claim by including personal expenses. Here is how the system works and what documentation CRA expects.
If your business is registered for GST/HST, you are paying sales tax on most of the things you buy to run the business. That money does not just disappear. You can claim it back. The mechanism is called an input tax credit, and a lot of small business owners leave money on the table because they do not claim everything they are entitled to.
This post covers how ITCs work, what qualifies, and what documentation CRA expects you to have. For advice specific to your situation, talk to your accountant or tax professional.
What an input tax credit actually is
When you file your GST/HST return, you report two numbers. One is the GST/HST you collected from your customers. The other is the GST/HST you paid on your business expenses. The difference is what you remit to CRA, or what CRA refunds to you.
An input tax credit is the credit you claim for the tax you paid on eligible business expenses. If you collected $10,000 in HST from clients and paid $3,000 in HST on your business expenses, you remit $7,000. The $3,000 is your ITC.
The logic is straightforward. GST/HST is a tax on final consumption. As a business, you are not the final consumer of the inputs you buy to deliver your service or product. The ITC system makes sure you are not permanently bearing the tax on those inputs.
What owners get wrong, and why it costs money
The most common mistake is not claiming ITCs at all because the bookkeeping is not set up to capture them. If your bookkeeper is not recording the HST paid on every eligible expense, you are overpaying CRA every period. For a business spending $150,000 a year on HST-applicable expenses in Ontario, missing the ITCs entirely means handing CRA roughly $19,500 extra per year.
The second mistake is claiming ITCs on personal expenses or expenses that are not business-related. CRA can audit ITC claims. If you cannot show the expense was for commercial use, you may have to repay the credit plus interest and penalties.
The third mistake is poor documentation. CRA has specific requirements for what a receipt needs to show before you can claim the ITC. If you are claiming ITCs based on incomplete records, you are exposed in an audit.
What qualifies for an ITC
Generally, you can claim an ITC for GST/HST paid on goods and services you acquired for use in your commercial activities. Commercial activities are the taxable sales you make to customers.
Common eligible expenses include: rent on a commercial space, office supplies, professional fees, advertising, equipment and technology, and subcontractor costs where the subcontractor charged you HST.
Expenses that are partially personal require a split. If you use your phone 70% for business and 30% personal, you can claim 70% of the HST as an ITC. CRA expects a reasonable basis for the split, and consistent application year over year.
Some expenses are specifically restricted. Meals and entertainment are generally capped at 50% for income tax purposes, and the ITC follows the same 50% rule. There are other specific restrictions, so this is an area where your accountant's input matters.
The documentation CRA requires
This is where a lot of ITC claims get disallowed in audits. CRA has minimum documentation requirements that vary based on the amount of the purchase.
For purchases under $30, a receipt showing the supplier name, date, and amount is sufficient. For purchases between $30 and $149.99, the receipt also needs to show the GST/HST registration number of the supplier. For $150 and above, the invoice needs to include the buyer's name or trading name, a description of the goods or services, the terms of payment, and the GST/HST registration number.
In practice, this means you need to keep proper invoices, not just credit card statements. A credit card statement shows that you spent money. It does not show the supplier's GST/HST number or a description of what you bought. CRA needs the actual invoice or receipt.
What to do about it
- Make sure your bookkeeper is recording HST paid on every expense. Every bill entry in your accounting software should capture the tax amount separately. If it is lumped in with the expense, you are not tracking ITCs properly.
- Keep actual invoices, not just bank or credit card records. For any expense over $30, you need the supplier's GST/HST registration number on the document. Credit card statements alone are not enough.
- Set a personal-use split for mixed-use assets and apply it consistently. Phone, vehicle, and home office are the common ones. Document your basis for the split and use the same percentage each period.
- Reconcile your ITC claims when you file. The total HST in your accounting system should match what you claim on your return. If your bookkeeper posts HST incorrectly or inconsistently, you could be under-claiming or over-claiming.
- Ask your accountant to review your ITC categories once a year. Tax rules change. Expenses that did not qualify before may qualify now. A quick annual review is worth the time.
The ITC system exists to make sure you are only paying GST/HST on your own margins, not on every dollar of input that flows through your business. Getting this right is not complicated, but it does require clean bookkeeping and proper documentation from the start.
If you want a second set of eyes on how your GST/HST returns are being prepared, book a free call at peterxiacpa.com/book.
Next step: browse the free small business tax deduction guide.
Frequently Asked Questions
- Can I claim an ITC on expenses that are partly personal?
- Yes, but only for the business-use portion. If an expense is 70% business and 30% personal, you can claim 70% of the GST/HST as an ITC. CRA expects a documented, consistent basis for the split.
- What documentation do I need to support an ITC claim?
- CRA requires the supplier's GST/HST registration number on any purchase over $30. For purchases over $150, the invoice also needs to include your business name and a description of what was bought. Credit card statements alone are not sufficient.
- Can I claim ITCs on meals and entertainment?
- Partially. Meals and entertainment are subject to a 50% restriction for income tax purposes, and the ITC follows the same 50% rule. So you can claim half the GST/HST paid on eligible meals and entertainment expenses.
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