Input Tax Credits (ITCs): Do You Qualify?

The ability of a person engaged in commercial activities (i.e., taxable sales) to claim input tax credits (ITCs) is a fundamental premise of the Goods and Services/Harmonized Sales Tax (GST/HST), as a value-added tax. However, a recent Tax Court of Canada decision in a case called ONErgy has raised some questions about ITC entitlement for costs relating to the winding down of a business. The court denied ITCs for expenses that a company incurred after ceasing business operations in order to sue former directors for alleged theft. The court appears to have adopted a somewhat narrow view of the ITC entitlements, given that the expenses were not connected to exempt activities nor to personal activities of individuals. Further, there are income tax cases suggesting that risk theft is to be considered part of one’s business. The company has appealed the decision.

This case is about the substantive requirements for ITCs. ITCs have been a major area of contention in recent years, but typically the focus has been on the supporting information requirements. Canada Revenue Agency auditors routinely deny ITCs when invoices do not match with their view of the required supporting documentation format. However, the actual rules governing ITCs are much more permissive regarding the form in which in the information appears. That being said, it is important and prudent to verify the GST/HST registration number of their suppliers.

Simon Thang, LL.B, LL.M (Taxation) is Toronto tax lawyer practising exclusively in the areas of sales tax (GST/HST, PST), and customs and trade. He is the principal of Thang Tax Law.