Being selected for a tax audit is something most businesses hope will never happen to them. Audits can be stressful even when all the expenses you have claimed are legitimate. Having the proper documentation in place can make the process a little less painful. However, when it comes to the audit of GST/HST Input Tax Credit (ITC), there are four steps to help you avoid having Canada Revenue Agency deny your claim during an audit.
Quick refresher: What is an Input Tax Credit (ITC)?
When your business is registered for GST/HST, you must charge the tax on sales of taxable goods and services. For example, let’s say your Ontario-based business issued an invoice for $1,000 plus HST of 13%. If that were the only transaction that occurred during the GST/HST reporting period, you would need to remit the entire amount of HST billed: 13% of $1,000 = $130.
If you are using the Traditional Method to calculate your GST/HST remittances (and not the Quick Method), you can claim an Input Tax Credit (ITC) for the GST/HST that you pay on your business expenses. ITCs reduce the amount of GST/HST that you need to remit dollar for dollar. Extending our example above, let’s say that in addition to billing the $1,000+HST, your business spent $200+HST on supplies during the same reporting period. $200 + $26 HST = $226 total. That $26 of HST paid is the Input Tax Credit. When it comes time to calculate the GST/HST to remit, you take the $130 collected, subtract the $26 ITC, and remit the difference of $104.
If you’re using the Quick Method, you can still claim ITCs but only for GST/HST paid on capital expenses. Traditional Method users claim ITCs for GST/HST paid on most business expenses, with occasional limitations.
Does CRA always accept Input Tax Credits as calculated?
Unfortunately, no. There are requirements for documentation and for ensuring that payments are being made to qualified suppliers. Dean Blachford of Blachford Tax Law has developed a 4-step system to walk through these requirements and help determine whether your claim will stand up to a CRA audit.
Dean Blachford’s 4-step system
Paraphrased, referenced with permission
Step 1: Do you have the right documentation?
To claim an Input Tax Credit (ITC), you need to be able to prove that you did pay GST/HST on the expense in question. If CRA were to audit your claim, they would be looking for supporting documentation that includes the following information:
- Name and GST/HST registration number of your supplier
- Date of invoice or date that the GST/HST was paid
- Total amount of the supplies, amount of tax paid
- Description of the supplies/services received
- Payment terms
If your purchase was $500 or more, you’ll want to make sure that you have all the information noted above. For smaller purchases, the requirements are a bit less stringent, but it’s probably still best practice to obtain the information noted above when possible.
Step 2: Did your supplier have a valid GST/HST number at the time of payment?
Your supplier’s GST/HST number should be included on any invoice that they issue. It’s wise to check the validity of the GST/HST number on the Canada Revenue Agency’s registry search the first time that you make a payment to the supplier, and again if you become suspicious of the supplier’s activity for any reason. Dean Blachford also suggests checking major suppliers’ GST/HST registration status on a quarterly or annual basis. It’s possible that a supplier’s GST/HST number may have been valid in the past but is no longer valid now.
You can find CRA’s GST/HST registry search here.
Step 3: Can you prove that you were not involved in a scheme with invoices of accommodation?
A scheme with invoices of accommodation involves false invoices that show GST/HST, payments for work that was never done, and funds eventually being returned to the business that paid them. The purpose of these schemes is to claim fraudulent Input Tax Credits. CRA might assume that this scheme is in place without sufficient evidence to support that assertion. Hopefully, this type of accusation will never be made against your business, but if it is, being able to demonstrate that your supplier operated a business over the relevant period and that you acquired the supplies in question from that supplier would be an excellent start to refuting it.
Step 4: Did the supplier in the supporting documentation make the supply?
The party who is supplying the goods/services must be the one whose name and business number are listed on the supporting documentation. At first glance, it might seem obvious that this would be the case, but issues can arise if a supplier uses another party’s GST/HST number to collect amounts but doesn’t remit the money collected to the government. If you’re checking the GST/HST number before making a payment, as discussed in step 2, you’ll at least know that the business you’re paying matches the one with the GST/HST number on the invoice. If you have any reason to believe that this isn’t the same business providing you with the goods/services detailed on the invoice, contact your McCay Duff LLP advisor to discuss possible next steps.
Another red flag to watch out for is if the business you’re paying is cashing your cheques at a cheque-cashing business instead of a bank – you should be able to tell by looking at the back of the returned cheque (or the image of the back of the returned cheque in your online banking system).
Being audited by Canada Revenue Agency is a possibility that you’d probably instead not think about. However, by taking reasonable steps to ensure that the ITCs you’re claiming are legitimate and adequately documented, you can save yourself some headaches should the dreaded audit ever occur.
Contact McCay Duff LLP to Help with An Audit of your GST/HST Input Tax Credits (ITC).
At McCay Duff LLP, we offer a team of skilled and highly experienced Chartered Professional Accountants who provide our business and non-profit clients with comprehensive assurance and audit services. No matter your audit or assurance needs, we can help.