Blog posts tagged with 'tax guide'

For small business owners in Ontario, managing finances means wearing many hats. One of the most important is that of a tax manager. While you collect Goods and Services Tax (GST) or Harmonized Sales Tax (HST) from your customers, you also pay it on almost every business purchase you make. This is where the input tax credit becomes a critical tool for managing your cash flow.

Claiming your ITCs correctly means you get back the GST/HST you paid on legitimate business expenses. This process reduces your net tax owing and can even result in a refund from the Canada Revenue Agency (CRA). Think of it as the government refunding you for the sales tax you paid to run your business.

This guide provides a step-by-step breakdown of how small businesses can successfully claim every eligible ITC.

What Is an Input Tax Credit?

An input tax credit (ITC) is the mechanism that allows you as a GST/HST registrant to recover the sales tax you pay on goods and services for your business. It is a core part of Canada's value-added tax system.

The system is designed so that the final consumer is the one who ultimately pays the sales tax. As a business in the supply chain, you act as a collector for the government. The ITCs ensure that you are not penalized for the tax you pay on your own business inputs.

The Basic Idea: Getting Your GST/HST Back

Imagine your business buys a new laptop for $1,000. In Ontario, you would pay 13% HST, which is $130. That $130 is an input tax credit you can claim.

When you file your GST/HST return, you report the total tax you collected from customers. You then subtract the total ITCs you are claiming. The difference is what you remit to the CRA.

• If you collected more tax than you paid, you send the difference to the CRA.
• If you paid more tax on expenses than you collected from sales, the CRA sends you a refund.

This makes managing your ITCs a direct factor in your business's cash flow.

Who Is Eligible to Claim ITCs?

Not every business can claim ITCs. The CRA has specific rules you must follow. Before you start tracking credits, make sure you meet the criteria.

Key Eligibility Requirements

You can generally claim an ITC if you meet all of the following conditions:

• You are a GST/HST registrant.
• You acquired the goods or services for consumption, use, or supply in your commercial activities.
• The expenses are reasonable for your business.
• You have sufficient documentation (receipts, invoices) to support your claims.

Commercial activity is a key term here. It means any business carried on with a reasonable expectation of profit. It does not include making exempt supplies like certain childcare services or music lessons.

A Step-by-Step Guide to Claiming Your ITCs

Following a structured process can simplify claiming your credits and ensure you stay compliant.

Step 1: Register for a GST/HST Account

You cannot claim an ITC if you are not registered for GST/HST. In Canada, you are required to register if your worldwide taxable revenues exceed $30,000 in a single calendar quarter or over four consecutive calendar quarters.

Even if you are a small supplier below this threshold, you can choose to register voluntarily. This allows you to claim ITCs which can be beneficial if you have high start-up costs or significant business expenses.

Step 2: Track Your Business Expenses Diligently

Accurate record-keeping is the foundation of claiming ITCs. You need a system to track every dollar spent on your business. This can be accounting software, a spreadsheet, or a dedicated ledger.

For each expense, you should record:

• The date of the purchase
• The vendor's name and GST/HST number
• A description of the goods or service
• The total amount paid
• The amount of GST/HST paid

Keep all original receipts and invoices. The CRA requires them as proof of your claims in case of an audit.

Step 3: Determine Which Expenses Qualify

Most expenses you incur for your business are eligible for ITCs. Common examples include:

• Office supplies and equipment (laptops, printers, stationery)
• Rent for your commercial space
• Utilities (hydro, internet)
• Professional fees (accounting, legal)
• Marketing and advertising costs
• Business-related travel expenses (meals, accommodation)
• Inventory and raw materials

Some expenses have special rules. For example, ITCs on meals and entertainment are generally limited to 50%. Certain expenses like bank fees or insurance premiums are exempt from GST/HST, so there is no ITC to claim.

Step 4: Calculate the ITC for Each Expense

Once you have a list of qualifying expenses, calculating the ITC is straightforward. The amount is simply the GST/HST shown on your receipt or invoice.

If an expense is used for both business and personal purposes, you can only claim an ITC for the portion used in your commercial activities. For example, if you use your mobile phone 60% for business and 40% for personal calls, you can only claim 60% of the HST paid on your monthly bill.

Be honest and reasonable in your allocations. The CRA may ask you to justify your calculations.

Step 5: Complete Your GST/HST Return (Form GST34)

This is where you officially claim your credits. Your GST/HST return has specific lines for reporting this information.

1. Line 105 - Total GST/HST collected: Report the total sales tax you charged your customers during the reporting period.
2. Line 108 - Total ITCs: This is the key line. Report the total sum of all eligible input tax credits you calculated for the period.
3. Line 109 - Net Tax: Subtract Line 108 from Line 105. This gives you your net tax.

If the result is positive, that is the amount you remit to the CRA. If it is negative, that is your refund. You can find more detailed instructions on the official Canada Revenue Agency website.

Common Mistakes to Avoid When Claiming ITCs

While the process is logical, there are common pitfalls that can cause problems for small businesses.

Poor Record-Keeping

Failing to keep detailed receipts is the number one reason ITC claims are denied during an audit. Make it a habit to scan or file every business receipt immediately. Cloud accounting software can make this process much easier.

Claiming ITCs on Exempt Supplies

You cannot claim ITCs for expenses used to provide exempt goods and services. If your business provides a mix of taxable and exempt supplies, you must allocate your expenses and only claim ITCs on the portion related to your taxable supplies.

Forgetting the Time Limits

There is a time limit for claiming an input tax credit. For most businesses, the deadline is four years from the due date of the return for the reporting period in which the expense was incurred. Do not let your unclaimed credits expire.

When Professional Help Makes Sense

Managing GST/HST and ITCs can become complex, especially as your business grows. The rules around mixed-use expenses, capital property, and vehicle expenses can be particularly tricky.

Engaging with a professional can provide clarity and confidence. Proper tax preparation and tax planning support better decisions and free you to focus on running your business. An expert can ensure you are maximizing your claims while remaining compliant, protecting you from costly errors.

At DKAJ Tax & Financial, we offer a range of tax services designed for small businesses in Ontario. We can help you set up an efficient tracking system, navigate complex ITC rules, and ensure your GST/HST returns are filed correctly and on time.

FAQs

1. Can I claim an ITC for a vehicle I use for my business?
Yes, you can claim ITCs on the purchase of a vehicle and its operating expenses (gas, maintenance). However, the amount you can claim is prorated based on the percentage of business use. The CRA has specific rules for calculating this, so careful logging is essential.

2. What happens if I make a mistake claiming an ITC?
If you discover a mistake on a previous GST/HST return, you can file an adjustment. If the CRA discovers the error during a review, they will reassess your return. This could result in you having to repay the incorrectly claimed ITC plus interest and potentially penalties.

3. Do I need the vendor's GST/HST number to claim an ITC?
Yes. For the CRA to consider an invoice or receipt valid for ITC purposes, it must include the seller's GST/HST registration number, along with other key details like the date, total amount, and the amount of tax paid.

4. Can I claim ITCs for expenses I paid before I registered for GST/HST?
Generally, you can claim ITCs on GST/HST you paid on inventory and capital property that you had on hand at the time you registered. You can also claim credits for services acquired up to 30 days before registration. Specific rules apply, so this is a good area to seek professional advice.

5. How often do I have to file a GST/HST return?
Your filing frequency (annually, quarterly, or monthly) is determined by your annual revenue. The CRA will assign you a reporting period when you register.