Canadian Taxes A to Z (2018): "I" is for Input Tax Credit

Today, I is for Input Tax Credit (ITC). Nine down, 17 to go!

Input tax credits are what makes GST/HST so good for business. You only need to remit to government the amount of GST/HST you collected from clients, minus the amount you paid out for inputs into your business.

Assuming you're in a business where you sell more than you purchase (always the preferred economic situation), you wind up effectively getting your supplies tax free! And who doesn't like that.

WHY ITC CALCULATION IS A PAIN & WHAT TO DO ABOUT IT

The thing that I find most confuses businesses about ITCs is how to calculate them, since the government gives you three main optional ways. Plus there are some special rules on ITCs for vehicles, aircraft, and capital property.

a. Special Rules on Planes & Automobiles, But Not Trains

For passenger vehicles, you are limited to claiming an ITC on the first $30,000 of the vehicle cost, and the vehicle needs to be used 90% or more for business purposes. Otherwise, the ITC claim is proportionate to the business use (down to a low of 10%). Aircraft aren't limited to the $30,000 cap (fortunately, unless you're in the market for a kite), but are still subject to the business/personal use ITC percentage rules.

b. Special Rules on Real Estate

For capital real property, if you're a GST/HST registrant buying property (like an office building) from a GST/HST registrant, no tax money usually needs to change hands. Instead, the purchaser will self-assess, provide a certificate to the vendor of the registration and self-assessment so that the vendor doesn't need to demand the tax at the time of closing, and then it all becomes "a wash" since the purchaser can at the end of year claim an ITC equal to the tax payable (but not actually paid) on the purchase.

The trick here is to make sure you register for the GST/HST if you're planning to buy real property subject to GST/HST. If you don't, you'll get stuck forking over the tax to the vendor, because you won't be able to claim an ITC.

WHICH OF THE THREE ITC METHODS IS BEST FOR YOUR BUSINESS

As for methods of calculation, you may have three choices: the quick method, the simple method, and the neither quick nor simple method (boringly called the regular method). 

1. The Quick Method. This is the only method which let's you actually make a profit on ITCs (though you need to report the profit as income). There are quite a few limitations as to who can use this method according to type of business and total sales, so consult your accountant.

I can't use it, for instance, because lawyers (and some other professionals) are explicitly excluded. It works best for those who collect lots of GST/HST, but don't buy many inputs (and thus don't generate many ITCs).

It's a percentage method based on your total sales rather than the actual GST/HST paid on supplies, and could lead to you having an extra $1000 in your pocket at the end of the year. The accountants at Grant Thornton have prepared a useful summary for considering whether to use the Quick Method: https://www.grantthornton.ca/resources/insights/articles/Election_to_use_Quick_Method.pdf

2. The Simple Method. This is the method that I and a lot of other businesses of moderate size use. There are yet again eligibility limitations on the size of revenues and total cost of supplies.

The advantage is that instead of separately reflecting the tax paid on every purchase in your bookkeeping records, you simply add up all ITC eligible business expenses (including GST/HST paid) and multiply the total by a particular fraction factor (depending on the rate of tax in your jurisdiction), which will give you an average of ITCs available to be claimed.

Regular limiting rules on things like being only able to claim 50% GST/HST on restaurant meals (because they are only 50% tax deductible) still apply.

3. The Regular Method. This method is the most painful of all, as it requires you to add up all the GST/HST you paid out, and deduct it from the GST/HST you collected. Subject, as usual, to various exceptions and qualifications.

This could lead to your bookkeeper trolling through thousands or tens of thousands of receipts to extract the tax paid. But it's still worth doing so, because every dollar in GST/HST you pay out, is usually one less dollar you need to remit to the CRA.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.