What is an input tax credit (ITC) for GST?
ITCs refer to the Goods and Services Tax/Harmonized Sales Tax (GST/HST) paid on the purchases and operating expenses used in a company’s commercial activities. Commercial activity is defined as any business in the nature of trade carried on but does not include the making of exempt supplies (see International FAQ #50) or any business in the nature of trade carried on that does not have a reasonable expectation of profit.
Before an ITC can be claimed, a company must be registered with a GST/HST account (see International FAQ #24 if you need to register). Most GST/HST registrants can claim ITCs on their GST/HST return related to their commercial activities. ITCs are credit for the GST/HST that is often paid on tangible property purchased and services used.
The ITCs will be claimed as a credit on the GST/HST return and will be deducted against any GST/HST collected on sales. If you have collected more GST/HST than you have paid, then you remit the net amount owing to CRA. If you have paid more GST/HST than you have collected, then you get a refund.
If an item is imported into Canada, GST will be assessed at the border and will be required to be paid prior to the item being released into Canada. This GST paid can be claimed as an ITC. It is important to note that if a company has not yet registered for a GST/HST account and they pay GST at the border, they should register for a GST/HST account as soon as possible. The Canada Revenue Agency (CRA) generally only allows registrations to be backdated 30 days from receiving the registration application. If GST was paid over 30 days prior to the registration, the company may not be able to claim it as an ITC. There are a few exceptions accepted by the CRA to backdate further (i.e. if a company has charged GST/HST to a customer); however, it is best to register sooner.
If a company is regularly paying GST when importing products into Canada, but is not required to register for a GST/HST account, a company can choose to voluntarily register for an account. However, they would want to ensure the GST paid outweighs the cost of regular GST/HST filings as filings can be monthly, quarterly or annually depending on the company’s annual sales.
If you would like to discuss ITCs and reporting them on your GST/HST return, please contact us.