We often find G/HST errors when working on the year end for businesses that process their own bookkeeping. In many cases, G/HST paid on expenses (otherwise known as Input Tax Credits or ITC’s), have gone unclaimed. There is a time limit to claiming the tax paid so try to avoid these common mistakes:
1. Change in G/HST rate. When the GST changed to HST over two years ago, the bookkeeping tax code was not changed to reflect the higher ITC. To avoid unclaimed ITCs always check the amount refundable against the invoice and set up a new tax code in the software.
What to do if you find unclaimed ITCs – Generally, registrants have up to three years to claim unclaimed ITCS. Rather than amending a return, claim the unreported amounts on the next return.
2. Inadequate documentation. In the event of an audit, sufficient documents are required to support ITCs claimed. This includes a valid G/HST registration number matched to the supplier. To verify the number, check the CRA website. Other information required includes a description of the sale, payment terms and the G/HST amount.
3. Restricted ITCs. As with business expenses (such as certain meals), ITCs are also restricted. When a meal is restricted to a claim of 50%, so is the ITC. My suggestion is to set up a special tax code in the bookkeeping software to include only 50% of the ITCs paid.
Expenses such as golf are specifically denied for tax purposes, therefore no ITCs may be claimed on these costs.
Blended use expenses, where a portion is personal in nature, will also be restricted. The personal portion of ITCs paid are not refundable.
4. Non-taxable supplies. Some expenses such as insurance, bank charges and out of country expenses are not subject to G/HST. These costs should not have any ITC claims associated with them.
5. Bad debts. When a sale is recorded on credit the G/HST must be remitted at the date of sales (invoice date). If the customer does not pay the full invoice and a bad debt adjustment is required, a G/HST adjustment is permitted. The calculation is set out by CRA.
Good business practices include frequently reviewing the G/HST rules. Should you have any concerns in the area, give us a call.