GST/HST Paid Before Registering: Input Tax Credit Rules

Can I claim GST/HST I paid before I registered?

Partly. Once you are registered, your first return can claim input tax credits (the GST/HST paid on business purchases, taken off the tax you owe or refunded if it is more) for three kinds of tax paid before registration: tax on property you still held on the registration date, if you were a small supplier just before registering; tax on services supplied to you after it; and tax on prepaid rent for periods after it. Tax on services you had already received before registering cannot be claimed (Excise Tax Act, section 171; CRA: Input tax credits). The registration date is the effective date on your CRA registration notice.

Every credit also needs tax that was actually paid or payable on the purchase (CRA). Goods bought from a seller who charged no tax, or goods sold or used up before you registered, leave nothing to claim.

A case is not simple when the purchase is large, the item was worth far less than you paid on the registration date, it is also used personally, the owner paid personally for a corporation, the first return is mostly a refund, or you have not applied yet or plan to register mainly to recover the tax: the effective date you request decides which purchases these rules cover. Gather:

• dated invoices showing the tax, and proof of payment
• the effective date on your registration notice
• a list of what you held on that date, with cost, tax paid, later improvements, market value and business-use share

I bought equipment or inventory before registering and still have it: can I claim the tax?

Often yes, if you were a small supplier just before you registered. The Act treats you as having bought, at the moment you registered, each item you then held to use or sell in the business, and as having paid tax equal to its "basic tax content" (section 171(1); CRA). Whether you were a small supplier just before registering depends on your taxable sales, those of your associates (closely related people and businesses) and the quarter timing rules; see when to register for the $30,000 test (section 148).

Basic tax content starts with the tax payable on the purchase and on later improvements, less rebates or similar amounts you were entitled to recover (input tax credits excluded), scaled down when the item's market value on the registration date is below the combined purchase and improvement cost (section 123; CRA Memo 8-5). The CRA's own example is a computer worth half its price on the registration date: it carries half the tax.

Business use then limits the credit. For most equipment, business use above 50% supports a full credit and use at or below it supports none (CRA: eligibility percentage). The CRA says the usual limits also apply to this deemed tax, including those for passenger vehicles (Memo 8-5, paragraph 30); for a car, see buying a car through your business.

Inventory you hold to sell is covered the same way, with the same market-value reduction. For goods ordered before registration but received afterward, the property rule needs you to hold the item and the services rule does not apply, and the CRA's memo on new registrants does not address it. Distinguish a true deposit from an advance payment, check when tax became payable, and have it reviewed first. Land and buildings can also qualify but follow different use tests and other conditions; see GST/HST on commercial property. For tax paid at the border, see GST on imports and customs invoices.

I paid for setup services before registering (design, legal, website, ads): can I claim that tax?

Generally no. Tax on a service supplied to you before the registration date cannot be claimed, even if you paid the invoice after registering (section 171(2); CRA). The date that counts is when the service was supplied, not when you paid.

Three points can change the answer:

• Services supplied later. An advance payment applied to the price before registration can support a first-return credit for work delivered afterward, to the extent the work is used in the business. A true deposit does not make tax payable until the supplier applies it to the price (section 168(9)), so check that date first. For a service delivered over time across the registration date, the CRA says to split the tax between the part before and the part after (Memo 8-5, paragraph 19) but shows a worked split only for rent, so have any other split checked.
• Corporation set-up costs. The CRA says legal, accounting and regulatory fees to set up a corporation may be depreciable property for income tax. Where they are, they count as property for this rule and a credit may be available (Memo 8-5, paragraph 14). Whether another cost, such as a logo or website, is a service or property is a question of fact; settle it before you claim or write it off.
• No sales yet. A lack of sales is not itself the test: the Act treats things done in connection with establishing a commercial activity as done in the course of it (section 141.1(3); Memo 8-5, paragraph 29). That assumes the business is, or will be, a commercial activity (see the registration section below). It does not change the timing rule above.

For the income-tax side of these costs, see startup costs before your first sale.

What about rent or other prepayments that cover a period after I register?

Claim the part that covers the time after the registration date. Rent, royalties and similar payments for earlier periods cannot be claimed (section 171(2); CRA: Input tax credits).

The CRA's example is three months of prepaid office rent, January 1 to March 31, with registration on March 1. The tax on March's rent can be claimed; the tax on January 1 to February 28 cannot (RC4022). The claim is limited to the extent the rented space is used in the business.

Which date counts as my registration date, and can it start before the day I apply?

It is the effective date the CRA states in writing (section 241(1)). For a voluntary registration it is usually the day you request the account, and the CRA will generally accept a date up to 30 days earlier. A corporation's date cannot be before it was incorporated (CRA: Register voluntarily).

The date sorts your purchases. A person generally has to be a registrant when tax first becomes payable or is paid to claim an ordinary credit, and the special rules above cover only earlier purchases (Memo 8-5, paragraph 12). An earlier date can move a recent purchase onto the ordinary side, but it also makes you a registrant from that day, and a registrant must charge tax on taxable sales (section 221(1); RC4022).

If you were required to register earlier, or charged tax more than 30 days before registering, the CRA has a separate request to backdate a registration by more than that (CRA); see when to register and charging GST/HST before registering.

Can I register before my first sale, and is registering just to recover tax allowed?

You can apply before any sale if you are engaged in a commercial activity in Canada (section 240(3)). A business that has not started making taxable supplies must show a clear intention to carry on a commercial activity. The CRA lists proposed contracts, a place of business, an incorporation or partnership agreement, and other efforts such as financial planning or raising capital as possible evidence (Memo 2.3, paragraphs 1 and 3, dated May 1999).

The sources set limits and leave one question open:

• Real business needed. A business run by an individual or an all-individual partnership without a reasonable expectation of profit is not a commercial activity, and exempt supplies are left out of it (section 123).
• Credits depend on purpose. An item qualifies to the extent it was acquired to make taxable supplies for consideration (section 141.01(2)). A purchase made for a business with no purpose of making taxable sales, such as one that makes only exempt supplies, does not meet that test.
• Commitments follow. You file returns, charge tax on taxable sales and generally stay registered for at least one year unless you stop commercial activities (CRA: Register voluntarily). Cancelling later can create GST/HST payable on inventory and equipment you keep (section 171(3)); see closing a GST/HST account before treating the startup refund as the final result.
• Unsettled. The CRA's current registration page speaks of businesses that make taxable sales, and its published guidance gives only the evidence list above, not a test of motive or of how far along a business must be, with no sales, before it accepts an application. That depends on the facts.

Registering mainly to recover one large purchase is therefore a judgment about the facts and the credit that is actually available, not a form to fill in.

How do I put the claim on my first return, and how long do I have?

Claim it on the return for the first reporting period (how often you file: monthly, quarterly or yearly) that ends after the registration date. The CRA treats these credits as arising in that period, and treats the days before your effective date as a separate short period that usually needs no return (Memo 8-5, paragraphs 38, 40 and 41). They are input tax credits, so they join the total on line 106. The CRA's return instructions give no separate line for them. If credits exceed the tax you charged, a negative balance on line 113 C of the paper return goes on line 114 as a refund; GST/HST NETFILE calculates it automatically (CRA: return instructions). See filing GST/HST and input tax credits for the return itself.

Most registrants have four years to claim, counted from the end of that first reporting period; a few high-revenue businesses have two years, counted from the end of the fiscal year that includes it. The deadline is the due date of the return for the last reporting period that ends within that window (section 225(4); CRA; Memo 8-5, paragraph 38).

1. Read the effective date on your registration notice.
2. List what you held on that date: item, purchase date, cost, tax paid, improvements, market value, business-use share.
3. Split any prepaid service or rent into the part before and the part after that date.
4. Match each line to its invoice.
5. Add the total to line 106 of the first return.

A claimed credit also lowers the cost you deduct or depreciate for income tax, since it counts as government assistance for that property or service (subsection 248(16)); see startup costs before your first sale.

What proof do I need for purchases made months ago?

Have the supporting records in hand before you file the return that claims the credit. The Act bars the credit unless you obtained sufficient evidence of the amount before filing (section 169(4); CRA). A bank or card statement shows what you paid but not the tax, so ask the supplier for a copy of any missing invoice now. For what an invoice must show, see GST/HST receipt details for input tax credits.

For property on hand, keep a dated list of what you held on the effective date, with a note on how you estimated each item's market value. For inventory, keep a count taken on that date. For prepayments, keep the contract or invoice showing which period it covers. Keep records for 6 years after the end of the year they relate to (section 286(3)).

Will the CRA review a first return that is mostly purchases and shows a refund?

It may. The CRA says every GST/HST refund request is systematically reviewed for errors or non-compliance, and some are examined further before payment; the claimant may be contacted by an examiner anywhere in Canada (CRA: GST/HST audit and examination). The CRA's page gives no processing time and does not single out new registrants. See GST/HST reviews and audits if a letter arrives.

What if I forgot to claim a purchase on my first return?

Claim it on your next return, on line 106, while the time limit has not run out (CRA: return instructions). The CRA generally refuses a request to amend a filed return when the only change is more credits, absent extenuating circumstances, because the amount can be claimed later (P-149R). The time limit still runs from the first reporting period, so a late claim has less time than it seems. See correcting a filed GST/HST return.

Example

These examples are illustrative; all amounts are Canadian dollars.

Equipment you still use

An Ontario freelancer, a small supplier before registering, buys a computer for C$5,000 plus C$650 HST (13%) in March and gets a voluntary account effective June 1. The freelancer uses the computer 90% for the business. On June 1 it would sell for about C$4,000 by the freelancer's estimate, four-fifths of its price, so the deemed tax is C$650 x 4,000 / 5,000 = C$520. Business use is above half, so the full C$520 can go on the first return. The other C$130 cannot.

A logo delivered before registering

The same freelancer paid a designer C$2,000 plus C$260 HST in April for a logo delivered in April. Treated as a service, it was supplied before June 1, so the C$260 gives no credit, even if the invoice is paid in July. If the freelancer had instead made a C$1,000 advance payment plus C$130 HST, applied to the website price in April, for a website delivered in July, the C$130 could be claimed on the first return, to the extent the site is used in the business.

Prepaid rent

An Alberta corporation prepays January to March rent of C$3,000 plus C$150 GST and registers on March 1. Only March, one third of the period, falls after registration, so C$50 of the GST can be claimed. The other C$100 cannot.

Different for you?

• You spent a large amount on equipment, inventory or setup before registering, or plan to register mainly to recover it, and the first return would be a refund: the answer turns on dates, market values and how each cost is classified. Which purchases qualify, which effective date to request and how to support a refund are the points to settle before you apply or file; see bookkeeping help.
• You were already past the small-supplier limit, or charged tax before you had a number: the property rule above depends on being a small supplier just before registering, so the answer may change; see when to register and charging GST/HST before registering.
• You paid personally, or your corporation repaid you: the property rule looks at what the registered business itself held, so who bought the item matters; see business expenses paid personally.
• You use, or plan to use, the Quick Method: the CRA says you cannot claim credits for operating expenses but may for some purchases, such as computers, vehicles and other large equipment (CRA: Input tax credits). Check how property on hand is treated before you elect; see the Quick Method guide.
• A purchase was missed on a return already filed: see correcting a filed GST/HST return.
• The CRA has written about your refund: see GST/HST reviews and audits.
• Your business is physically in Quebec: you file GST/HST returns with Revenu Québec on its forms, so the CRA notice and line numbers above may differ (RC4022).
• You also paid PST or QST: this page covers GST/HST only; see provincial sales tax and charging GST/HST, PST and QST by province.
• Your books for the months before registering are not set up: see setting up books for a new business.