Deciphering Input Tax Credits for Small to Medium-sized Businesses in Canada 0

Posted On January 11, 2024, by Trevor Buttle

Running a business in Canada comes with its own set of financial intricacies, and one aspect that often perplexes entrepreneurs is understanding and maximizing input tax credits (ITCs). Let us break down what they are, when and how they can be claimed, the eligible expenses, and the necessary information to support these claims.

What is an Input Tax Credit?

At its core, an Input Tax Credit (ITC) is a mechanism that allows businesses registered for the Goods and Services Tax/Harmonized Sales Tax (GST/HST) to recover the taxes paid or payable on property and services used in the course of their commercial activities. The term “inputs” refers to all property and services for consumption, use or supply in the course of commercial activities. Of course, these expenses must be reasonable (in quality, nature and cost) and directly related to your business.

In simpler terms, it is a way for businesses to recoup the GST/HST they have paid on eligible expenses.

What & When Can It Be Claimed?

One common question from our clients relates to understanding what is eligible (and what is not) for an input tax credit. First, your business needs to be eligible to claim ITC’s. That means businesses must meet certain criteria:

  • Acquired, imported, or brought into a participating province, property or services for commercial activities.
  • Be a GST/HST registrant during the reporting period when GST/HST was paid or became payable.
  • Paid or payable GST/HST in relation to the property or service.
  • Obtain sufficient documentary evidence to substantiate the ITC before making a claim.
  • File the ITC claim within the time limit in a GST/HST return.

Next, you need to understand what types of expenses are eligible (or not!). Some examples include business start-up costs prior to registration, business-use-of-home expenses, legal and accounting fees, maintenance and repairs, motor vehicle expenses, and more. However, it is crucial to note that not all expenses qualify; for instance, personal-use property or services, certain capital property, and fees to recreation or dining clubs are ineligible.

Generally, businesses claim ITCs when filing their GST/HST return for the reporting period in which purchases were made. Unclaimed ITCs from previous periods may also be claimed on future returns, with a four-year window for retroactive claims.

How Much Can Be Claimed?

For eligible expenses used exclusively for commercial activities, businesses can claim ITCs for the full amount of the GST/HST paid. However, certain situations may impose restrictions, requiring businesses to determine the percentage of use in commercial activities and calculate the corresponding ITC amount. This is particularly relevant to motor vehicle and business-use-of-home expenses. For example, if your vehicle is used for both business and personal reasons, accurately tracking the usage for each purpose is key to correctly claiming the ITC. Further, meals and entertainment can only be claimed up to 50%. These are a couple of common examples, however as additional restrictions may apply, consulting with a sales tax professional for your business is critical.

In essence, understanding ITCs involves knowing your eligible expenses, determining usage percentages, and choosing the calculation method that best fits your business scenario.

What Info is Needed to Support Them?

Claiming ITCs requires accurate documentation and a clear understanding of eligible expenses. Suppliers must provide specific information on invoices, receipts, or contracts when supplying taxable property and services to a GST/HST registrant. This information is crucial for purchasers to support their claims for ITCs or rebates.

Navigating the complexities of ITCs is a crucial aspect of financial management for small to medium-sized businesses in Canada. By staying informed, business owners can maximize their tax recovery and ensure compliance with the GST/HST regulations. As the saying goes, knowledge is power, and in the world of ITCs, it is also the key to financial efficiency for your business.

For more information, refer to CRA’s information:

or speak with one of our team to see how this applies to your business.

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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.

GBA LLP is a full-service accounting firm in the Greater Toronto Area, but we primarily service all of Ontario as well as the rest of Canada virtually, except Quebec. Our team of over 30, provides Audits and Reviews of financial statements, and Compilations of financial information, as well as corporate tax returns.  We provide specialized corporate tax and succession planning for small and medium businesses, in addition to general advisory services.

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