Input tax credit
The credit a registered business claims for the GST/HST it paid on business purchases, deducted from the tax it owes on its sales.
In short
- It is how sales tax flows through a business without being a cost to it.
- Claims need proper records, with more detail required as the purchase gets bigger.
- In Quebec, the equivalent for QST is the input tax refund (ITR).
An input tax credit, or ITC, lets a GST/HST registrant recover the tax it pays on purchases used in its commercial activities. On each return, the business subtracts its ITCs from the GST/HST it collected. If the credits exceed the tax collected, the business receives a refund.
What qualifies
ITCs can generally be claimed on purchases used to make taxable supplies, including zero-rated ones. They cannot be claimed on purchases used for exempt supplies, such as most residential rent, or for personal use. Some costs are restricted: for meals and entertainment, generally only 50% of the tax is recoverable.
The documents you need
The CRA sets information requirements by purchase amount:
- Under $100: supplier name, date and total amount.
- $100 to $499.99: also the supplier's GST/HST registration number and the tax charged or rate.
- $500 or more: also the buyer's name, a description of what was bought and the terms of payment.
A card statement alone does not meet these requirements. It shows the total but not the supplier's registration number or the tax.
Timing
Most businesses have four years from the due date of the return for the period in which the tax was paid to claim an ITC. Unclaimed credits are one of the most common ways businesses overpay sales tax, usually because the receipt went missing or lacked the required details.
Worked example
A laptop purchase
A registered business buys a $1,800 laptop in Ontario and pays $234 HST. Because the purchase is over $500, the invoice must show the supplier's HST number, the business's name, a description and payment terms. With that invoice, the business claims a $234 ITC. The laptop costs it $1,800, not $2,034.