Input Tax Credits Can Save You Money In 2022
October 10, 2022 Andrew AdolphAudits
If you don’t know about input tax credits, then you probably are leaving thousands of dollars on the table!
What Are Input Tax Credits?
Do you run a business in Canada? If so, you’re probably eligible for input tax credits.
Input tax credits are the sum of the GST/HST you paid on legitimate business expenses.
When you prepare your business’s GST/HST return, you recover the GST/HST paid out on purchases and expenses related to your business by claiming them as input tax credits.
How to Claim Input Tax Credits
The ability to claim back input tax credits is what makes the GST/HST superior to any of the provincial sales taxes. It is designed so that the individual consumer bears the cost of the tax. The business just collects it and passes it along.
With the provincial taxes, on the other hand, the business can pass some costs, but not all of them. The GST system is considered better because goods can be exported with no tax on them simply by making the GST rate equal to 0% on exports. Under the PST systems, there is always going to be some tax built up in the cost of the goods being exported.
The first step claiming input tax credits is to determine if you are eligible for GST/HST registration, click here.
Once you’ve got that out of the way, you’ll need to track your GST/HST expenses when you make a business-related purchase so that you can record and claim them on your GST/HST return.
If Only it Were That Simple
Businesses love that they can claim input tax credits and only wish there were more of them. Some businesses, like farms and grocers, are usually in a refund position when they file their GST returns. They meet the condition of being in commercial activity, the items they sell have no GST, but there is GST in the things they buy to run the business.
What many people don’t know is that they need to be carefully scrutinizing the receipts and invoices they collect to support input tax credits, as these slips of paper need to have certain information on them because if they don’t, they will be disallowed in an audit situation.
The amount of information required depends on the amount of the transaction.
For amounts less than $30:
- The date
- The name of the vendor
- The total amount
For amounts above $30.00 but less than $150.00:
- All that plus
- The vendor’s registration number
- Which items were taxed which tax(es)
For amounts above $150.00:
- All the plus
- The recipient’s name
- A description of each item enough to identify it
- Terms of payment
These together are referred to as the Input Tax Credit Regulations.
The GST spent around for over 30 years now even so, there are people not doing it properly. In fact, entire industries are not doing this properly. For proof of this, look at an airline ticket. These are also often thrown out after use!
In an audit, the auditor will comb through your ITC claims. On the bigger ones, he wants to know who is the legal claimant and what was the exact amount of GST or HST that was paid if it is not easily determinable (like the airline ticket example). A nice auditor will give you a chance to get this info together, but really it should have been in place when you claimed the amount.
Hiring a tax audit accountant or CPA bookkeeper can significantly help you keep track of your business’s financial position. Knowing your numbers allows you to maximize savings and profitable opportunities and avoid costly mistakes long term.
Are you a small business owner or freelancer looking to grow and sustain your business?
To book a free meeting, call 604-240-6173 or email me at firstname.lastname@example.org. I can answer any financial or tax-related questions and help you set a profitable financial plan. You can also visit the Blog for additional tax-related resources.
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Andrew Adolph is a CPA and former CRA auditor with 25 Years of experience. He helps businesses to not par any more in sales taxs than the law says they must and acts as an advocate for you if you are being audited, so you can fous on your business.