Input Tax Credits (ITCs) and What Qualifies

Introduction
Understanding input tax credits and what qualifies is essential for every GST/HST and QST-registered business in Canada. Input Tax Credits (ITCs) allow businesses to recover GST/HST paid on expenses incurred to earn taxable revenue. In Québec, this system is mirrored by Input Tax Refunds (ITRs) for QST. ITCs and ITRs are often the most significant source of tax recovery for corporations and self-employed individuals. However, CRA and Revenu Québec impose strict rules to prevent abuse and deny ITCs when documentation is incomplete, expenses are ineligible, or sales tax treatment is incorrect. Businesses that misunderstand input tax credits and what qualifies risk losing thousands of dollars and facing audit exposure. This guide explains the rules, documentation standards, common mistakes and best practices for claiming ITCs and ITRs correctly.

Legal and Regulatory Framework
Input tax credits and what qualifies are governed by the Excise Tax Act (GST/HST) and Québec’s Taxation Act (QST). ITCs may be claimed only when:

• the business is registered for GST/HST
• the expense is incurred to earn taxable supplies
• GST/HST was actually paid on the purchase
• valid documentation supports the claim
• the claim is made within the statutory time limit (typically 4 years)

Eligible expenses include:

• office supplies
• advertising
• professional fees
• rent
• utilities
• vehicle expenses (business-use portion)
• travel and meals (portion eligible for ITCs)
• capital asset purchases (subject to CCA rules)
• subcontractor invoices
• software and online service subscriptions
• tools, equipment, and technology used to earn income

Québec Input Tax Refunds (ITRs) follow similar rules but require separate provincial calculations, especially for large businesses.

Understanding input tax credits and what qualifies ensures accurate and defensible claims.

Key Court Decisions
Courts have issued extensive rulings that clarify input tax credits and what qualifies. Key legal principles include:

• ITCs require proper invoices — Courts consistently deny ITCs when receipts lack GST/HST registration numbers, supplier names, or tax breakdowns.
• ITCs must relate to commercial activity — Personal or mixed-use purchases cannot be fully claimed.
• ITCs cannot be claimed without proof of payment — CRA frequently denies claims where payment records are missing.
• Businesses must be registered before claiming — ITCs incurred before registration may be partially claimable but require special rules.
• Reality over form — Courts look at the economic substance of the transaction, rejecting bogus invoices or fabricated suppliers.

Québec courts interpret ITR claims just as strictly, with many cases denying ITRs for incomplete documentation or improper classification of taxable vs exempt activities. These rulings show why businesses must understand input tax credits and what qualifies.

Why CRA and Revenu Québec Target This Issue
ITCs are heavily audited because they directly reduce government revenue. CRA and Revenu Québec commonly target ITC claims when:

• invoices are missing mandatory details
• expenses include personal or non-business costs
• vehicle expenses are overclaimed
• subcontractor payments lack receipts
• ITCs exceed GST/HST collected
• capital asset purchases are incorrectly classified
• businesses file late claims beyond allowable deadlines
• QST ITR claims differ from GST ITC claims

Audit triggers include:

• large GST/HST refunds
• inconsistent GST/HST vs QST filings
• significant ITC spikes from year to year
• subcontractor payments to non-registered suppliers
• use of online platforms without proper documentation

Understanding input tax credits and what qualifies dramatically reduces audit risk.

Mackisen Strategy
Mackisen CPA provides a complete, documentation-driven approach to input tax credits and what qualifies:

• verifying supplier GST/HST and QST registration numbers
• reviewing invoice formats for compliance
• checking that purchases relate to commercial activities
• tracking capital asset ITCs and linking them to CCA classes
• analyzing vehicle and travel expenses for eligible ITC percentages
• reconciling ITCs with GST/HST and QST returns
• reviewing online subscriptions (Shopify, QuickBooks, Meta Ads, Google Ads) for correct tax treatment
• correcting past errors through voluntary disclosures
• preparing GST/HST and QST returns with defensible ITC/ITR claims
• creating systems for ongoing invoice capture and organization

Our method ensures all ITC and ITR claims withstand CRA and Revenu Québec audits.

Real Client Experience
Many businesses approach Mackisen after CRA denies ITCs. One client used handwritten receipts without tax numbers. CRA rejected all ITCs. Mackisen restructured their invoicing procedures and recovered eligible credits going forward.

Another Québec business claimed QST ITRs using invoices that did not meet invoicing standards. Revenu Québec disallowed the claims. We rebuilt documentation and corrected the filings.

A construction contractor improperly claimed ITCs on personal truck expenses. CRA partially denied the claim. Mackisen separated personal vs business use and implemented a compliant tracking system.

An e-commerce business claimed ITCs on foreign software invoices with no GST/HST. We corrected their claims and advised on tax treatment for digital services. These real cases show why businesses must understand input tax credits and what qualifies.

Common Questions
Businesses frequently ask:

• Can I claim ITCs if I am not registered?
No—registration is required.

• Can I claim ITCs on personal expenses?
No—only the business-use portion qualifies.

• Do I need the supplier’s GST/HST number?
Yes—it must appear on the invoice.

• Can I claim ITCs on imported goods?
Yes—if GST/HST was paid at the border.

• Can I claim old ITCs?
Only within the 4-year deadline (or 2 years for some large businesses).

• Do QST ITR rules match ITC rules?
Mostly—but Québec requires separate calculations and filings.

Understanding these answers clarifies input tax credits and what qualifies.

Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you're filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency and protection from audit risk. When handling input tax credits and what qualifies, Mackisen provides full documentation systems, reconciliation procedures, voluntary disclosures and audit defense to protect your business from costly errors.