What Is an Input Tax Credit? How ITCs Work in Canada

An input tax credit is how a GST/HST-registered business recovers the sales tax it pays on business purchases. You subtract the GST or HST paid on eligible inputs from the tax you collected on sales, and remit only the difference. Claim it on line 108 of the return, keep proper invoices, and claim within the time limit.

GST and HST are designed to be paid by the final consumer, not by the businesses in between. A registered business charges tax on its sales and pays tax on its purchases. The input tax credit, usually shortened to ITC, is the mechanism that lets it recover the tax on its purchases, so the tax only sticks at the end of the chain.

In practice, a business does not send the government every dollar of tax it collects. On each GST/HST return it adds up the tax charged to customers, subtracts the tax it paid on eligible business inputs, and remits the net amount. If the credits are larger than the tax collected, the business gets a refund instead.

"Inputs" is broad. It covers inventory bought for resale, materials, rent on business premises, professional fees, software, equipment, vehicles, telephone and internet, advertising and most other costs of running the business, provided GST or HST was charged and the purchase is for use in the business's taxable activities.

The CRA sets out the conditions. You must have acquired the property or service for use in your business, you must be a GST/HST registrant in the reporting period when the tax was paid or became payable, GST/HST must actually have been paid or payable on the purchase, you must hold sufficient documentary evidence before you claim, and you must claim within the time limit. Each of those conditions has its own section below, because each is a common reason claims are reduced on review.

The GST/HST return reduces to three numbers. The tax you collected or should have collected on sales goes on line 105. Your total input tax credits and adjustments go on line 108. The difference, your net tax, goes on line 109. A positive figure is owed to the CRA; a negative one is a refund.

A worked example in Ontario

Take an Ontario renovation contractor filing quarterly in 2026. In one quarter it bills $120,000 of work plus 13% HST, so it charges $15,600 of HST. In the same quarter it buys $40,000 of materials, tool rentals and subcontracted work, all with 13% HST, so it pays $5,200 of HST.

On line 105 the contractor reports $15,600. On line 108 it claims $5,200 of input tax credits. Line 109 shows net tax of $10,400, which is what it remits. Without the ITCs, it would remit the full $15,600 and absorb the $5,200 as a cost, which is exactly the tax-on-tax the system is designed to avoid.

Now suppose the next quarter is quiet: $30,000 of billings ($3,900 of HST) but a $60,000 equipment purchase ($7,800 of HST) along with ordinary materials. The ITCs exceed the tax collected and the return shows a refund. A refund return can be held for review before the money is paid, so this is the quarter where clean invoices matter most.

Two practical points follow. First, ITCs are tracked in the bookkeeping, not reconstructed at filing time: each purchase is entered with its tax portion coded separately, so the ITC total falls out of the books. Second, a business that records purchases tax-included and never separates the GST/HST is either overstating its expenses or forgetting its credits. A properly set up bookkeeping system splits the tax at the point of entry, and contractors will find the wider issues covered on our construction accounting page.

Only GST/HST registrants can claim input tax credits. A business that is not registered pays GST/HST on its purchases like any consumer and has no way to recover it. That is the trade-off behind the small supplier rule.

A business is a small supplier while its taxable sales, together with those of associated businesses, stay at or below $30,000 over four consecutive calendar quarters or in a single quarter. Small suppliers do not have to register. Once a business crosses that threshold, registration becomes mandatory and it must start charging tax.

Small suppliers can register voluntarily, and the input tax credit is the main reason to. A new business spending heavily on equipment, fit-out or inventory before its sales build up can recover the GST/HST on those costs only if it is registered. A business that sells mainly to other registered businesses gives up little by charging tax, because its customers will claim that tax back as their own ITCs.

The calculation runs the other way for a business that sells mainly to consumers. A hairdresser, tutor or home-based baker below the threshold who registers must add tax to every price, and consumers cannot recover it. Unless the business's own purchases carry a lot of tax, voluntary registration can cost more in lost sales or margin than it returns in ITCs.

Registration also comes with obligations: filing returns on time, issuing invoices with your GST/HST number, and keeping records for at least six years. If you are deciding whether to register, or have just crossed the threshold, our GST return service handles the registration and filings, and our post on small business tax write-offs covers the income tax side of the same purchases.

Whether you can claim an input tax credit depends not only on what you buy but on what you sell. GST/HST law sorts every supply into three categories: taxable at the standard rate, zero-rated, and exempt. The first two are both "taxable supplies" and both allow ITCs. Exempt supplies do not.

Zero-rated supplies are taxed at 0%. Basic groceries, most exports, and prescription drugs are familiar examples. A business making zero-rated sales charges no tax, but it can still claim ITCs on its inputs, which is why exporters and grocery wholesalers often file refund returns.

Exempt supplies are outside the system. Residential rent, most health care services, many financial services, and child care are common examples. A business making exempt supplies charges no tax and cannot claim ITCs on the inputs it uses to make them. The GST/HST it pays on those inputs is simply a cost of doing business.

Mixed businesses are where this gets hard. A clinic offering both exempt health services and taxable cosmetic ones, or a landlord with residential and commercial units in one building, must allocate input tax between the two activities and claim only the taxable share. The CRA expects a reasonable allocation method applied consistently, and it is one of the first things a GST/HST auditor checks.

An input tax credit is only as good as the document behind it. The Input Tax Credit Information Regulations set out what a supporting document must show, and the requirements step up at two amounts: $100 and $500, measured on the total paid or payable on the invoice.

A credit card slip is rarely enough on its own above $100, because it does not show the supplier's registration number or the tax. Keep the itemized receipt or invoice. For large purchases, make sure the invoice is in the business's name, not an employee's or the owner's personal name, and that it describes what was bought.

The registration number deserves a check of its own. A supplier quoting an invalid or cancelled number, or charging tax without being registered, leaves you holding a claim the CRA can deny. The CRA's GST/HST registry lets you confirm a supplier's number before you pay a large invoice, and it is worth doing for any new supplier.

Many purchases are used partly for business and partly for something else, whether personal use or an exempt activity. The CRA's rules for the input tax credit eligibility percentage depend on what kind of purchase it is.

Operating expenses. For most businesses, if 90% or more of an expense is used in commercial activities, you claim the full ITC. If 10% or less is, you claim nothing. In between, you claim the commercial percentage. The CRA's own example: an $80 HST utility bill used 70% commercially gives a $56 ITC.

Capital personal property, such as equipment, furniture and computers, works on an all-or-nothing test for corporations, individuals and partnerships. If commercial use is more than 50%, you claim a full ITC; at 50% or less, none. Changes in use later can trigger adjustments in either direction.

Passenger vehicles have their own rules. A corporation using a passenger vehicle more than 50% commercially can claim the full ITC, subject to a cap. For 2025 the CRA's example limit is that the purchase price above $38,000 is not eligible for an ITC. Individuals and partnerships using a vehicle between 50% and 90% commercially claim based on capital cost allowance instead of the purchase price. At 10% or less, no ITC is allowed.

Real property, such as a building, follows another set: corporations and partnerships claim in proportion to use between 10% and 90%, while an individual cannot claim an ITC on property used more than 50% personally.

The practical lesson is to decide and document the business-use percentage when you buy, not at year end. A mileage log for a vehicle, a floor plan for a building, or a note on who uses a piece of equipment is what supports the claim if the CRA asks.

Some purchases never qualify for an input tax credit, or qualify only in part, however businesslike they are. The CRA lists the main restrictions.

• Personal purchases. Property or services bought for your own personal consumption, use or enjoyment, or for a relative's, do not qualify.
• Club memberships. Membership fees or dues to any club whose main purpose is to provide recreation, dining or sporting facilities are excluded, unless you buy memberships to resell in your business.
• Meals and entertainment. Only the allowable part qualifies. For most businesses that is 50% of the GST/HST on reasonable meal and entertainment costs; charities and public institutions claim 100%, and long-haul truck drivers 80%.
• Inputs used for exempt supplies. As section 04 explains, tax on purchases used to make exempt sales cannot be recovered.
• Unreasonable expenses. The expense must be reasonable in quality, nature and cost in relation to the business.

For meals and entertainment, the CRA allows two methods. You can claim 50% of the actual tax in each reporting period. Or you can claim 100% as you go and add back half at year end, as an adjustment in the first reporting period of the next fiscal year. Pick one and apply it consistently; mixing them is how the same meal ends up recovered twice.

Restaurants and food businesses deal with this from both sides: they charge GST/HST on meals and claim ITCs on their own food, supplies and equipment. Our restaurant accounting page covers the issues specific to that sector.

You claim an input tax credit in the reporting period in which the GST/HST was paid or became payable, or in a later period within the time limit. Tax generally becomes payable on the earlier of the day you pay and the day payment is due under the invoice, so an ITC can often be claimed before the invoice is actually paid.

For most registrants, the time limit is four years. ITCs must be claimed by the due date of the return for the last reporting period that ends within four years after the end of the reporting period in which the ITC first became available. A credit missed in one quarter can be picked up in a later return, provided it is inside that window.

The window is shorter for some businesses. Listed financial institutions, and businesses whose threshold amount exceeds $6 million in both the current and the preceding fiscal year, generally have two years, measured from the end of the fiscal year that includes the period the ITC arose. Charities and businesses whose supplies, other than financial services, are at least 90% taxable keep the four-year limit.

Claiming late is better than not at all, but it has costs. An ITC claimed years after the purchase draws attention on review, and the supporting invoice has to be found and still meet the information rules. Building ITCs into the regular monthly or quarterly bookkeeping avoids the scramble.

Becoming a registrant does not reach back in time for everything, but it does reach back for some things. The CRA's position is that if you were a small supplier, you may be able to claim ITCs on property you held when you registered, such as capital property and inventory, for the portion you will use in your commercial activities.

Services are treated differently. You cannot claim ITCs on GST/HST paid or payable on services supplied to you before you became a registrant, and you cannot claim ITCs on rent or similar payments for periods before your registration. A new business that paid six months of fit-out labour and rent before registering has lost the tax on those; the stock and equipment it still holds on the registration date are a different story.

Take a retailer who crosses the $30,000 threshold and registers in 2026 holding $25,000 of inventory bought with 13% Ontario HST. Inventory bought for resale and still on hand at registration can support an ITC for the $3,250 of HST paid on it. A shelving system bought earlier, still used in the shop, can be claimed too, subject to the capital property rules. The accountant's fees for setting up the business last year cannot.

Timing therefore matters. A business that expects to cross the threshold, or to buy significant equipment, should think about registering before the spending rather than after. Our small business accounting team often has this conversation with clients in their first year.

The quick method of accounting is a simplified way for smaller businesses to calculate their GST/HST. Instead of tracking every input tax credit, the business remits a fixed percentage of its tax-included sales, set by the CRA according to the type of business and the province. The remittance rate already builds in an allowance for the tax the business pays on its purchases.

The trade-off is in the ITCs. If you use the quick method, you cannot claim ITCs on your operating expenses, and that includes the tax on meals and entertainment. You can still claim ITCs on certain purchases, such as capital property eligible for capital cost allowance and land. So a quick-method business buying a $20,000 machine still recovers the tax on it.

Eligibility is limited. Under the CRA's current rules, a business can generally elect the quick method if its annual worldwide taxable supplies, including those of associates and including GST/HST, are not more than $400,000 in any four consecutive fiscal quarters in the last five, and it has a permanent establishment in Canada. Some businesses, such as those providing legal, accounting or financial consulting services, cannot use it.

Whether it saves money depends on the business's margin and how much tax its purchases carry. A service business with few taxable inputs often comes out ahead, because the remittance rate assumes more input tax than it actually pays. A business with heavy taxable purchases, such as one buying a lot of materials, usually does better claiming ITCs in full. Run the numbers both ways on a full year before electing.

Our HST return service includes this comparison for clients considering the switch, and the fixed fees for ongoing filing are on our GST/HST filing pricing page.

Where you do business changes the rate you pay and how much of it you can recover. In the HST provinces, the federal and provincial portions are combined into one tax, and an input tax credit recovers the whole amount. The CRA's rate table shows Ontario at 13%, New Brunswick, Newfoundland and Labrador and Prince Edward Island at 15%, and Nova Scotia at 14% since its rate fell from 15% on 1 April 2025.

Everywhere else, the federal GST is 5%, and an ITC recovers that 5%. Provincial sales taxes are separate. British Columbia, Saskatchewan and Manitoba levy their own PST, which is a retail sales tax with no equivalent of the input tax credit: a business generally pays PST on taxable goods it uses, and recovers nothing unless a specific exemption applies at the time of purchase.

Quebec runs its own sales tax, the QST, alongside the GST. Revenu Québec administers both for most Quebec businesses, and QST registrants recover QST through input tax refunds, which work in much the same way as ITCs. A Quebec business claims ITCs for GST and input tax refunds for QST, on the same return.

Businesses operating across provinces need to apply the right rate to each sale under the place-of-supply rules, and recover the tax actually charged on each purchase. A Toronto firm buying services from a Halifax supplier pays and recovers whatever HST the supplier correctly charged. Our Toronto tax accountants and Halifax tax accountants work with businesses on both sides of that arrangement.

For a related corner of the rules, our post on whether gift cards carry GST/HST shows how the timing of tax on a sale can differ from the timing of the payment.

The input tax credit is simple in principle and detailed in practice. Most businesses lose money on ITCs in the same few places: tax never separated from purchases in the books, invoices that do not meet the $100 and $500 information rules, mixed-use assets claimed at the wrong percentage, meals claimed in full, credits missed in one period and never picked up, and inventory on hand at registration that nobody thought to claim.

Our professional tax accountants prepare and review GST/HST returns for registered businesses, reconcile the ITCs on each return to the books, and catch up missed credits inside the time limit. Ongoing filing is quoted at a fixed fee agreed before work starts, and you pay after the service. If you are deciding whether to register, or whether the quick method suits you, we will run the numbers both ways before you commit.

Call +1 (416) 619-0068 or ask us about your GST/HST returns and we will tell you what we need and what the fee will be.