Most Canadian businesses must register to collect and pay the goods and services tax (GST) and harmonized sales tax (HST) on eligible items. If you are operating a Canadian business and registered for the GST/HST, you can get back the GST/HST you've paid out during a particular reporting period by claiming it through input tax credits (ITCs) on your GST/HST return.
When you complete your GST/HST return, you declare the amount of GST/HST you collected from various customers and deduct your ITCs from this amount to determine your GST/HST net tax. If the resulting amount is negative, you will get a GST/HST refund.
Rules for Claiming Input Tax Credits
The general rules for claiming input tax credits are just like the rules for claiming any business expenses:
- Your business must have been registered for GST/HST at the time of the purchases.
- You must have receipts to back up your claims
- You can only claim ITCs "to the extent that your purchases are for consumption, use, or supply in your commercial activities."
Time Limit for Input Tax Credits
Normally you should claim your Input Tax Credits for the reporting period in which you made the purchases. If for some reason you missed or forgot to file an ITC you can claim it in a later reporting period. The claim must be made within four years from the end of the reporting period in which the claim was originally due, unless your business has had revenues in excess of $6 million in each of the previous two fiscal years. In that case, the ITC claim must be made within two years from the end of the original reporting period.
You must retain all receipts in support of your ITC claims in case the Canada Revenue Agency (CRA) wishes to examine your records. The CRA can audit your GST/HST return up to four years after submission.
The Quick Method of Accounting for GST/HST
If your business does not normally qualify for GST/HST refunds (that is, the total GST/HST that you collect from sales is more than what you pay out for supplies) you can elect to use the quick method of accounting for GST/HST. The quick method was introduced to save paperwork and accounting for small businesses.
In a nutshell, the quick method allows you to pay a reduced portion of the GST/HST you collect based on a formula rather than claiming ITCs on most of your purchases and paying the difference between what you collect and what you pay. For certain types of businesses that have few taxable expenses (such as IT contractors, writers, graphic artists, etc.) the quick method allows you to save money.
To qualify for quick accounting:
- You must have been in business for 365 days prior to the start of the reporting period.
- Your annual revenue (including GST/HST) must be $400,000 or less for the first or last four of five fiscal quarters.
- Your business must not provide legal, accounting, bookkeeping, financial consulting, tax preparation, or consulting services.
- Your business can't be certain kinds of financial institutions, charities, or public institutions.
Note that even though you do not have to state the actual GST/HST collected or paid on your return using the quick method, you still have to retain records of the information for six years after the year in question in case you receive a CRA audit.
You can apply to use the quick method via your online My Business Account.
Provinces That Charge GST and Provincial Sales Tax
If you are doing business in one of the provinces that charge GST and Provincial Sales Tax (PST—currently B.C., Saskatchewan, Manitoba, and Quebec) you must file separate returns for PST. Whether you can claim tax credits and refunds for provincial sales tax depends on the province.
- British Columbia and Saskatchewan do not allow businesses to use input tax credits to recover PST paid on business expenditures.
- Quebec businesses can claim input tax refunds on the Quebec Sales Tax (QST) on purchases made in the course of commercial activities.
- Manitoba does not have tax credits or refunds on the Retail Sales Tax (RST) for businesses, with a few rare exceptions for certain farm-related activities.