Introduction – What is the Simplified Method for Claiming ITCs
Certain Canadian businesses that use the regular GST/HST reporting method can use a simplified method to calculate their input tax credits. Business that have elected to use the Quick Method of Accounting for GST/HST purposes cannot use this method because input tax credit claims are already built in to the prescribed Quick Method remittance rates.
This article will use terminology found in the Excise Tax Act. Three important terms are explained below.
- If you make a “supply,” you are providing or selling property or a service. For most businesses supplies are sales but the term “supply” also encompasses transfers, barters, exchanges, licences, rentals, leases, gifts or dispositions.
- “Taxable supplies” refer to any supply that is subject to Canadian GST/HST. This includes supplies of property and services that are made in Canada as well as supplies that are imported into Canada. There are also special cases within the “taxable supplies” category. Sale-leaseback arrangements, tips and gratuities, trade-ins, and commercial leases are some examples of special cases. The significance of special cases is that the regular GST/HST treatment may not apply. To illustrate using the tips and gratuities category, voluntary cash tips that customers leave are not subject to GST/HST; however, if you add a mandatory gratuity to a bill or service charge it is subject to GST/HST.
- “Associates” is a term used to describe a relationship of control between two or more parties. Under the Excise Tax Act the concept of associated persons applies to corporations, individuals, partnerships and trusts. Associated persons are defined in section 127 of the Excise Tax Act. For associated corporations, the Excise Tax Act refers to the Income Tax Act definition in subsection 256(1).
Association with another person and/or changes in your supplies may alter your eligibility for use of the simplified method of claiming input tax credits. If you have questions about associated persons or taxable supplies, contact our expert Canadian tax lawyers.
Eligibility for the Simplified Method for Claiming ITCs
Listed Financial Institutions cannot use the simplified method for claiming input tax credits. Further, your business must meet all of the following conditions to be eligible:
- Your annual worldwide revenues from taxable property and services (including those of your associates) are $1 million or less in your last fiscal year;
- Your total taxable supplies (including those of your associates) for all preceding quarters of the current fiscal year must be $1 million or less; and
Please note this limit does not include goodwill, zero-rated financial services, or sales of capital real property.
- Your taxable purchases made in Canada for the last fiscal year are $4 million or less. Zero rated purchases are excluded from this limit.
If you qualify, you can start using the simplified method at the beginning of a reporting period. No forms are required; however, once you use this method you must do so for at least one year so long as you continue to meet the eligibility criteria.
How to Use the Simplified ITC Claim Method
Purchases made in both participating and non-participating provinces must be separated based on the rate of GST/HST paid. Participating provinces have harmonized sales tax and include NB, NL, NS, ON and PE. Only purchases you use to provide (sell) taxable property and services can be included in the calculation. Purchases for personal use as well as purchases made to provide tax exempt property and services are excluded from the calculation.
The following steps summarize how to use the simplified method of claiming input tax credits.
Step 1: Add up your ITC eligible business expenses. These expenses will include the following:
- The GST/HST;
- Non-refundable PST;
- Taxes or duties on imported goods;
- Reasonable tips;
- Interest and penalty charges related to purchases taxable at the GST or HST rate; and
- Reimbursements paid to employees, partners, and volunteers for taxable expenses.
There are a variety of expenses that are not included in this calculation including, but not limited to, purchases made outside Canada that are not subject to GST/HST, real property purchases, expenses on which you have not paid GST/HST, refundable or rebatable PST, amounts paid or payable in reporting periods before you started using the simplified method and 50% of meal and entertainment expenses.
If you have questions about ITC eligible business expenses, our expert Canadian Tax Lawyers can assist you.
Step 2: Multiply the amounts calculated in Step 1 by the appropriate percentage based on the rate at which you paid tax.
Step 3: Calculate and add any additional amounts excluded from Step 1. For example, ITCs for GST/HST paid or payable on real property purchases.
The total of the amounts in steps 1, 2 and 3 will be entered in line 108 (electronic filing) or line 106 (paper filing) of your GST/HST tax return.
Conclusion Simplified ITC Claim Method
By grouping taxable purchases, you do not have to show GST/HST separately in your records; however, you should keep the relevant documents to support your input tax credit claims in case of tax audit and/or tax reassessment. If you have questions about the simplified method for calculating input tax credits or are experiencing other GST/HST taxation issues, one of our expert Canadian Tax Lawyers can provide tax help.
FAQ: Simplified Method for Claiming Input Tax Credits (ITCs)