Input tax credits explained: getting your GST back.

Once you register for GST, you start charging 5% on your sales. The upside is that you can claim back most of the GST you pay on business costs. Those claims are called input tax credits, and they're the difference between GST being a pass-through and GST being a cost.

Here are input tax credits explained from the ground up: what they are, how to calculate them, what CRA wants to see, and how they flow through your books. Whether you run a studio in Spruce Grove, a trade in Leduc or a consultancy in Downtown Edmonton, the rules are the same.

1Input tax credits explained in one example

Say you're a GST-registered photographer. You buy a $2,000 lens and pay $100 of GST, for $2,100 total. Later that quarter you invoice clients $10,000 plus $500 of GST.

When you file, you don't send CRA the full $500. You subtract the $100 you paid on the lens and send $400. That $100 is your input tax credit. In effect, GST only taxes the value your business adds, and the credit stops tax from piling up at every step of the supply chain.

How the purchase is recorded

This is the journal entry for the lens. The GST goes to an asset account (often called ITCs or GST receivable), not to the equipment cost:

For income tax, the lens is depreciable property claimed through capital cost allowance (CCA) over several years. The GST, though, is claimed in full on the return for the period you bought it. Two different systems, two different timings. Our post on capital cost allowance covers the income tax side.

2What qualifies for an ITC

You can generally claim an ITC when all of these are true:

• You're registered for GST during the period you claim it.
• GST was actually charged. No GST on the invoice, no credit.
• The purchase is for your commercial activities, meaning taxable or zero-rated sales, not exempt ones.
• You've paid it or it's payable. An unpaid supplier invoice still counts once it's issued.
• You have the right documents to back it up.

Common sources of ITCs for small businesses: commercial rent, software subscriptions, phone and internet, office and shop supplies, equipment, tools, advertising, professional fees, fuel and vehicle repairs (business share), and inventory bought for resale.

Timing: when to claim, and for how long

You claim an ITC on the return for the period in which the GST was paid or became payable, which is usually the invoice date. You don't have to wait until you've paid the supplier. If you miss one, most small businesses can still claim it on a later return, generally up to four years after the period it belonged to. Some larger businesses have a shorter window.

New registrants get a helpful rule too. When you register, you can generally claim ITCs on inventory you have on hand for resale and on capital property, like equipment and computers, that you still own and use in the business, as long as you have receipts showing the GST you paid. The details are specific, so check CRA's rules or ask your accountant before your first return.

3Receipt rules: the $100 and $500 lines

CRA scales the documentation it wants to the size of the purchase. These thresholds apply to the total amount paid or payable for the supply:

A bank or credit card statement on its own isn't enough, because it doesn't show the GST or the supplier's number. Save the actual receipt or invoice, digitally is fine, for six years from the end of the year it relates to.

4The restrictions that trip people up

Meals and entertainment: 50%

Take a client to dinner on 124 Street for $200 plus $10 GST and you can claim $5. The restriction mirrors the income tax rule that only half of meals and entertainment is deductible.

Personal and mixed use

If something serves both your business and your personal life, claim only the business share. Here's a worked example for one quarter, for a hypothetical Leduc tradesperson:

The $66 you can't claim becomes part of the cost of those items. Only the business-use share of that cost is a deductible expense for income tax.

Things with no GST to claim

Insurance premiums, interest, most bank and payment-processing fees, wages, residential rent and purchases from small suppliers who don't charge GST. None of these produce ITCs.

Exempt sales

If your business makes GST-exempt sales, like many health services, you can't claim ITCs on costs that relate to them. A clinic that sells both exempt treatments and taxable products has to apportion its costs. That's one reason our physiotherapist bookkeeping guide spends so long on GST.

Recreational club memberships and passenger vehicles

GST on memberships in golf, dining or recreational clubs generally can't be claimed. Passenger vehicles have their own limits tied to the CCA cost cap. Check CRA's current rules before claiming GST on a car or SUV.

5Input tax credits in QuickBooks Online

In QuickBooks Online Canada, ITCs are created by the tax code you choose on each expense, bill or bank transaction. Pick the GST code and QuickBooks splits the total: the expense goes to your chosen account and 5/105 of a tax-included amount goes to your GST receivable side. Choose an exempt, zero-rated or out-of-scope code and no ITC is created.

The common problems all come from automatic coding. Bank rules that tag every transaction with GST will happily claim GST on insurance and bank fees. Meals need the 50% treatment, which may mean editing the tax amount by hand. And mixed-use items need splitting. Review your GST report line by line before each return, and see our guide on how to calculate your GST return for the full process.

6Common ITC mistakes

That last one matters more than people expect. If you discover unclaimed GST from a past period, most small businesses can claim it on a later return, generally within four years. A catch-up review often finds credits that were never claimed. Our catch-up bookkeeping service does exactly that.

If you're not sure whether your ITCs are being claimed correctly, Plum reviews and files GST for businesses across Edmonton, Spruce Grove and Leduc. Book a free 15-minute call and we'll look at your last return with you.

7Questions people ask

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This article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.