What Are Input Tax Credits?
Definition & Examples of ITCs in Canada
Input tax credits (ITCs) are credits that some Canadian businesses can claim for sales taxes paid on items purchased to produce their goods and services.
If you pay the goods and services tax (GST) or harmonized sales tax (HST) on goods or services for your business, you may be eligible to claim some of these taxes as credits and reduce your total taxes due. Learn more about ITCs and how to claim them on your Canadian tax return.
What Are Input Tax Credits?
If you run a business in Canada, you will collect and remit the GST/HST, as well as provincial sales taxes (PST) in some areas. But you may be able to take ITCs against some of what you have to remit.
Input tax credits are the sum of the GST/HST you paid on legitimate business expenses or the allowable portion of the GST/HST paid. When you prepare your tax business' tax return for the Canada Revenue Agency (CRA), ITCs are the vehicle for recovering the GST/HST paid out on purchases and expenses related to your commercial activities.
- Acronym: ITC
How ITCs Work
You must be registered for the GST/HST to claim input tax credits. Once you are, you'll need to track all eligible GST/HST expenses when you make a business-related purchase so that you can record and claim them on your GST/HST return. As with all expense claims, make sure you keep all related receipts so you can back up your claims if necessary.
Additionally, in order to qualify for ITCs, you must have purchased, imported, or otherwise brought in goods to a participating Canadian province for consumption, use, or supply during the course of your normal business activities. And, of course, you must have paid the GST/HST on these goods.
There is also a time limit for claiming ITCs. For most businesses, you must claim ITCs within four years of the due date of the original return for which you are claiming them. For some businesses with revenues in excess of $6 million annually and some financial institutions, however, the deadline is two years.
When you file your GST/HST return, you will include your input tax credits on line 108 (line 106 for paper filers) of your return. These credits will be deducted from your final GST/HST balance owed.
What Qualifies for Input Tax Credits
As per the CRA's website, the following are some of the expenses for which you can claim Input Tax Credits:
- Commercial rent
- Equipment rentals
- Advertising-related expenses (business cards, flyers, and ads, for example)
- Accounting, legal, and other professional fees
- Home office and motor vehicle expenses
- Office expenses (postage, computers, pens, and paper)
- Travel (hotel, airfare, and car rentals)
There is also a list of capital expenses that qualify, including:
- Capital property
- Machinery and vehicles
- Furniture and appliances
- Improvements to capital property
GST/HST paid on any of these items may be eligible for input tax credits. A full list is available on the CRA's website.
You can only claim Input Tax Credits for goods and services related to your business. According to the CRA, the purchase or expense must be reasonable in quality and nature, as well as in cost.
Goods and services you purchased for your own personal use or enjoyment don’t qualify for ITCs. Other purchases or expenses for which you cannot claim ITCs include:
- Taxable goods and services bought or imported to provide exempt goods and services
- Some capital property
- Membership fees or dues to "any club whose main purpose is to include recreation, dining, or sporting facilities (including fitness clubs, golf clubs, and hunting and fishing clubs), unless you acquire the memberships to resell in the course of your business."
- Input tax credits (ITCs) are credits available to Canadian businesses for GST/HST paid on goods and services needed to do business.
- You may not claim ITCs on purchases you made for personal use.
- You can claim the credits when you file your GST/HST return, but you must keep adequate records to back up your claims.
- Qualified ITCs will reduce the amount of GST/HST you must remit.