If you’ve registered to collect the goods and services or harmonized sales tax (GST-HST) in Canada, you may have come across the term input tax credit or its acronym, ITC, and wondered what it’s all about. To understand input tax credits (ITCs) you need to understand the basics of the GST-HST system, which are simply:
- GST-HST registrants collect sales tax from Canadians on their fees/sales and remit it to the government; and
- In return, the government returns to the registrant any GST-HST they spent on their business
That second point is where input tax credits come in. An input tax credit is what you earn every time you pay GST-HST on an expenditure for your business. You claim all these input tax credits, or ITCs, on your GST-HST return for a rebate.
ITCs are subtracted from the GST-HST you are required to remit to the Canada Revenue Agency (CRA). For example, if you collected $1,000 in GST-HST on sales, but you spent $250 in GST-HST on your business, you’d only have to remit $750 to CRA. If input tax credits are high and most of your sales are non-taxable (for example, if you make sales to non-Canadian payers), ITCs can even generate a refund on your GST-HST return.
ITCs are the reason that being a registrant always means more money in your pocket in the end. They’re definitely the best thing about being GST-HST registered.
The worst thing about GST-HST registration is, of course, having to file GST-HST returns. Luckily, Personal Tax Advisors files your GST-HST for free.
If I’m on the Quick Accounting for GST/HST, I’m not entitled claim the ITC on the commission I pay my agents, is that correct?
That’s correct. The (estimated) ITCs are folded into the reduced amount of GST/HST remittance. So instead of remitting all the GST/HST you collect and getting back the GST/HST pay on commissions, you just pay a portion of the GST/HST you collect and that’s it.
Will ITCs have to be added back to corporate income and then have an associated tax liability for small business? E.g. if ITC = 10000, and small business effective tax rate is 11%, will 10k have to be included in taxable income and create an overall tax of 10k x 11% = 1100?
Mathematically similar, but conceptually incorrect. If your corporation is indeed registered for the GST/HST, your corporate income should never have included the GST/HST you spent in the first place. The T2 should report your revenue (net of GST/HST collected), minus expenses (net of GST/HST spent).
How do I enter business expenses on the T2125? With or without HST? Do I have to use ITC on the HST remittance or can I just report HST collected and put expenses with HST included on the T2125? I just exceeded 30k and registered a HST number. I am setup as an annual filer. My income will be over 60k and expenses 15k. Should I do quick method? If so when do I make an election for it?
If you’re a GST/HST registrant, you should not include GST/HST in your expenses on T2125, because you’re going to claim them back on your GST/HST return. Since you’re getting them back, you can’t also deduct them from your business income – they’re not part of your expenses! To elect for the Quick Method, you need to wait out at least one year of GST/HST registration. After that point, you can request the election at any time, and can have the date of change back-dated to the beginning of the current calendar quarter. So for example, if you finished out 2024 as a GST/HST registrant and it’s now March of 2025, i.e., the first quarter of 2025, you can elect for the Quick Method and date the change back to January 1, which is the beginning of the current calendar quarter.