Taxes
Input Tax Credits (ITCs) in Canada Explained
Input tax credits let GST/HST-registered sole proprietors recover tax paid on business purchases. Learn who can claim ITCs and how to file them today.
In Canada, input tax credits (ITCs) are how a GST/HST-registered business recovers the GST/HST it paid on goods and services used in its commercial activities. If you are a sole proprietor registered for GST/HST, claiming input tax credits effectively refunds or offsets the tax you were charged by suppliers, so it does not become a permanent cost of doing business.
What Are Input Tax Credits?
An ITC is a credit you claim on your GST/HST return for the GST/HST you paid or owe on purchases and expenses related to your business. When you charge GST/HST to customers, you collect it on behalf of the CRA. From that amount, you subtract the ITCs you are entitled to and remit the difference. In simple terms, ITCs stop the GST/HST from piling up along the supply chain.
ITCs apply to the GST/HST portion of a purchase, not to the underlying cost. The business expense itself is still reported for income tax purposes, as discussed below.
Who Can Claim ITCs?
Only businesses registered for GST/HST can claim input tax credits. That includes most sole proprietorships once they are registered, whether they registered voluntarily or because they no longer qualify as a small supplier.
Key conditions, as of the current tax year:
- You must be registered for GST/HST with a valid Business Number (BN) and GST/HST account.
- The purchase must be for consumption, use, or supply in your commercial activities.
- You must have acceptable supporting documentation, such as supplier invoices.
- You must claim the ITC within the time limit CRA sets for the reporting period, or you may lose it.
Unregistered sole proprietors cannot claim ITCs even if they paid GST/HST. This is one reason businesses sometimes register before they are required to. See Do I Need to Charge GST/HST? for the current rules.
What Purchases Qualify for an ITC?
You can generally claim ITCs on GST/HST paid for goods and services you use in your business, including office supplies, equipment, advertising, and professional fees.
ITCs are not available for every purchase. Common exclusions include:
| Purchase type | ITC generally available? |
|---|---|
| Business supplies and inventory | Yes |
| Business-use equipment and tools | Yes |
| Personal or non-business expenses | No |
| Exempt supplies (for example, certain insurance) | No |
| Purchases from a non-registered supplier with no GST/HST charged | No tax to recover |
If an expense is partly personal and partly business, you can usually claim an ITC only on the business portion, based on a reasonable allocation.
How to Claim Input Tax Credits
You claim ITCs on your GST/HST return for the reporting period in which the tax was paid or became payable. The return has a dedicated line for input tax credits; you enter the total eligible amount there and it reduces the net tax you owe.
- Confirm you are GST/HST-registered.
- Keep the original invoices or receipts showing the supplier's GST/HST number and the tax charged.
- Total the eligible GST/HST for the period.
- Enter the ITC amount on your GST/HST return.
- File the return and pay any net tax owing by the due date.
Reporting periods vary — monthly, quarterly, or annual — and the filing method depends on your account. For more detail, see How to File a GST/HST Return in Canada. The tax you paid depends on the supplier's province; see GST/HST Rates by Province.
Records You Need
CRA expects records that clearly show the GST/HST paid. A valid invoice usually needs the supplier's name and GST/HST number, the date, a description of the purchase, and the amount of tax. Keep receipts and invoices for the retention period CRA requires — generally several years from the end of the tax year, though you should confirm the current rule on canada.ca.
If you claim an ITC without adequate records, CRA can disallow it during an audit, and you may have to repay the credit plus interest.
Common ITC Mistakes to Avoid
- Claiming ITCs on personal purchases.
- Claiming the full ITC on an expense that is only partly for business.
- Missing receipts, or invoices that do not show the supplier's GST/HST number.
- Claiming outside the CRA time limit.
- Forgetting to reduce the income tax deduction by the ITC amount recovered.
ITCs and Your Income Tax Return
ITCs reduce your GST/HST bill, not your income tax. When you deduct a business expense on Form T2125, the deductible amount is normally the cost before GST/HST, because the tax portion was recovered through an ITC. If you could not claim an ITC, the unrecoverable tax may be included in the expense, depending on the rules.
This guide is general information only and is not tax or legal advice. GST/HST and income tax rules can differ by situation, so confirm details with CRA or a qualified tax professional before filing.
Frequently asked questions
Can a sole proprietor claim input tax credits?
Yes, but only if the sole proprietorship is registered for GST/HST. Once you have a Business Number with a GST/HST account, you can claim ITCs on GST/HST paid for business purchases. An unregistered sole proprietor cannot claim ITCs, even if suppliers charged GST/HST. If you are unsure whether you should be registered, review the small supplier rules or ask a tax professional.
Do I need receipts to claim input tax credits (ITCs)?
Yes. CRA expects supporting documentation for every ITC you claim. A valid invoice normally shows the supplier's name and GST/HST number, the date, a description of the purchase, and the GST/HST charged. Without adequate records, CRA can disallow the ITC during an audit and require repayment plus interest. Keep your receipts and invoices for the retention period CRA requires.
How long do I have to claim an input tax credit?
CRA sets a time limit for claiming ITCs, generally several years from the due date of the return for the period in which the tax was paid or became payable. If you miss that window, the ITC is normally lost. Because the deadline can change and depends on your reporting period, confirm the current rule on the CRA website or with a qualified tax professional.
Are input tax credits taxable income?
No. ITCs are not income; they simply recover GST/HST you paid on business purchases. However, they affect your income tax deduction: because you recovered the tax portion, you generally deduct the expense net of GST/HST on Form T2125. In effect, the ITC reduces your GST/HST bill and adjusts the expense amount, rather than adding to your taxable revenue.