GST/HST Input Tax Credit: Meals, Tips, Insurance, Bank Fees

Which expenses give no input tax credit, or only part of one?

A GST/HST registrant claims an input tax credit (ITC) only for GST/HST that was charged on a business purchase and that the Excise Tax Act (the Act) lets it claim. A credit goes missing for one of two different reasons: no tax was charged, or tax was charged and the Act cuts or blocks the credit. Keep the two apart in the books (CRA: Input tax credits).

What makes a case not simple:

• Credits were claimed on these costs for several years, so past returns carry the error.
• A corporation's ledger mixes the owner's personal costs with business costs.
• Purchases cross provinces or come from outside Canada.
• The accounting software codes every expense at one tax code, so it calculates a credit on tax that was never charged.
• The CRA has written about the credits.

If credits on these costs were claimed in more than one return, or the CRA has written, list the open periods before correcting any of them: see the section on past returns below.

What to gather: receipts that show the tax, bank and card statements, the filed GST/HST returns, and the ledger with its tax codes.

How much GST/HST can I claim on meals and entertainment, and where does the rest go on my return?

Where the income tax deduction for meals and entertainment is limited to 50%, the GST/HST credit is limited to 50% of the tax. The Act ties the two together: the credit is cut where section 67.1 of the Income Tax Act limits the cost (Excise Tax Act, s. 236). A cost that escapes the income tax limit keeps its full credit. The limit does not apply, for example, to food and drink a business sells in the ordinary course of its business, to an amount billed to a client at a reasonable, specifically identified amount, or to up to six staff events a year open to all employees at one place of business; a conference fee that includes meals is split (Income Tax Act, s. 67.1).

The CRA lets a registrant choose one of two ways to claim (CRA: RC4022):

With the second method, the add-back is made once a year, not on the return that claimed the credit. A monthly or quarterly filer adds it in the first reporting period of the next fiscal year; an annual filer adds it for that fiscal year; a registrant that cancels its registration adds it in the period of cancellation (Excise Tax Act, s. 236; CRA: RC4022; CRA: return instructions). If the add-back is never made, the credits stay overstated every year. The return instructions and RC4022 put the add-back on line 104, and for electronic filers line 105 is then calculated from lines 103 and 104.

The part that is not recovered is part of the cost of the meal in the books. The same limit applies when a business reimburses an employee or partner for meals in Canada (CRA: RC4022). The Act also gives no credit on an amount that is not reasonable in the circumstances (Excise Tax Act, s. 170).

Which meals escape the income tax limit, and how a corporation adds the limit back on its T2, are covered in meals and entertainment in corporate books.

Is there GST/HST on a tip, and how do I separate it from a restaurant receipt?

A tip a customer gives freely carries no GST/HST, so on credits worked out from the actual tax on receipts it adds none. (Under the simplified method for claiming ITCs, a reasonable tip can enter the purchase total the credit is figured from; see filing GST/HST and claiming ITCs.) A mandatory or suggested service charge that the restaurant adds to the bill does carry GST/HST (CRA: special cases). The test is who adds the amount: the customer, or the restaurant.

The tip is still a cost. The CRA's income tax guide lists gratuities with entertainment expenses, which are subject to the income tax limit (CRA: T4002).

From a restaurant receipt:

1. Keep the itemized bill. A card slip that shows only a total with the tip hides the tax.
2. Record the meal and the GST/HST exactly as printed, including the tax on any service charge.
3. Record the tip as its own line with no GST/HST.
4. Apply the meals limit to all the GST/HST on the bill, including the tax on any service charge (Excise Tax Act, s. 236).

Can I claim an input tax credit for business insurance?

Ordinarily not: the premium itself carries no GST/HST. An insurance policy is a "financial instrument" under the Act, issuing or renewing one is a "financial service" (Excise Tax Act, s. 123), and a supply of a financial service is exempt (Excise Tax Act, Schedule V, Part VII). The CRA's income tax guide says the same of exempt purchases generally: no tax paid, no credit to claim (CRA: T4002).

A credit needs tax that was charged, so a premium that shows none carries no credit to record. No credit does not mean no deduction: the CRA's income tax guide treats commercial insurance on business buildings, machinery and equipment as a deductible expense (CRA: T4002).

If an insurance invoice does show GST/HST, find out what it was charged on. The Act's definition of a financial service leaves out, for example, the service of providing advice (Excise Tax Act, s. 123).

Provincial taxes on premiums are outside GST/HST; see provincial sales tax.

Do bank fees, card fees and interest carry GST/HST I can claim?

Usually not, because they pay for financial services, which are exempt. The Act's definition covers exchanging, paying or transferring money, running a chequing or other account, lending money and granting credit, paying interest, and services under card-voucher agreements (Excise Tax Act, s. 123). Account fees, transfer fees, loan interest, credit-card interest and card-payment fees ordinarily show no GST/HST.

The definition has carve-outs. It leaves out advice, and certain information, document-processing and customer-assistance services supplied with a financial service. When a bank or card statement shows a GST/HST line, find out what it was charged on: tax on a taxable service is claimed like any other purchase, with the usual proof, while tax charged on a financial service is tax paid in error, which is not tax payable, so it is not claimable and should be recovered from the financial institution (CRA: Memorandum 8.1, para. 60). When it shows none, there is nothing to claim and nothing to add.

These are still business expenses. The CRA's income tax guide allows interest on money borrowed for business and bank charges incurred to run the business (CRA: T4002). For the codes that keep tax-free costs out of the credit, see exempt, zero-rated and out-of-scope purchases and recording GST/HST in your books.

I paid HST in another province or at the wrong rate: how much can I claim?

Claim the tax that was payable on the supply, not the tax that was charged. The credit is figured on the tax that becomes payable on the supply, or is paid without becoming payable (Excise Tax Act, s. 169). The CRA's view is that an amount paid as tax in error is not tax payable under the Act, so the buyer is not strictly eligible for a credit on it and should recover it from the supplier (CRA: Memorandum 8.1, para. 60). The rate follows the place where the supply is made, which is not always where the supplier is based. The CRA's general rules (CRA: place of supply):

• Goods: the province where the goods are delivered or made available to the buyer.
• Services: the province of the recipient's address in Canada that the supplier obtains in the normal course of business. If the supplier holds more than one, it uses the address most closely connected with the supply.

Special rules can override these for some supplies, so check before concluding that an invoice is wrong. The address the supplier holds for you matters.

GST of 5% applies where the supply is made in a province without HST. In a participating province the HST rate runs from 13% in Ontario to 15% in New Brunswick; the list by province is in charging GST/HST, PST and QST by province.

If the invoice shows HST on a supply made in a GST-only province, only the GST part is claimable; the excess is for the supplier to refund or credit. A supplier in another province who charged the right rate for the place of supply has charged nothing in excess.

Tax charged above what was collectible is excess tax. The supplier may adjust, refund or credit it within 2 years of the day it was charged or collected, and issues a credit note. A buyer who already claimed the amount adds the credited amount to net tax in the period it receives the credit note (Excise Tax Act, s. 232; CRA: Memorandum 12-2). The supplier decides whether to do so.

If the supplier will not, the CRA has a rebate for tax paid in error, applied for within 2 years after the payment. The CRA does not pay it on an amount for which an ITC was claimed or could be claimed, so an excess already claimed as a credit is not rebated again (CRA: RC4033). If you are the supplier that charged the wrong rate, see charged the wrong GST/HST rate.

What do I owe on a purchase from outside my HST province, or from outside Canada?

A registrant in an HST province may have to self-assess (work out and pay itself) the provincial part of the HST on property or services it brings in without paying that part, and report it on line 405 (tax you assess yourself) (CRA: place of supply; CRA: return instructions).

The tests below are for a registrant on the regular method. A Quick Method filer is not excused by commercial use and can owe the provincial part even on a fully commercial purchase (Excise Tax Act, Schedule X).

• Goods: a registrant self-assesses when it consumes, uses or supplies the goods less than 90% in its commercial activities (its business, other than the part that makes exempt sales). At 90% or more, a registrant does not self-assess.
• A service bought in a non-participating province: a resident of a participating province self-assesses when the service is used 10% or more in participating provinces, unless it is a registrant and uses the service 90% or more in its commercial activities (New Harmonized Value-added Tax System Regulations, No. 2, s. 15).
• Small amounts: no self-assessment if the tax from all amounts to be self-assessed in a calendar month is $25 or less (s. 15).

The self-assessed amount goes on line 405. On the regular method, the part that relates to commercial use is claimed back as a credit on line 106; the CRA describes line 106 as covering tax on property and services "brought into a participating province" (CRA: return instructions). A Quick Method filer claims no operating-cost credits.

Imports and services bought from a seller outside Canada follow separate rules: see GST on imports, foreign suppliers and contractors and GST/HST on ads from foreign platforms.

What about club dues, personal-use items and costs I use partly for business?

Club dues give no credit. A registrant cannot include tax on a membership in a club whose main purpose is to provide dining, recreational or sporting facilities, unless it buys the membership only to resell it (Excise Tax Act, s. 170).

Personal-use items give no credit. The CRA bars credits on property or services bought for personal consumption, use or enjoyment (CRA: Input tax credits). The Act also bars a credit on something a registrant acquires exclusively for the personal enjoyment of an officer or employee, with narrow exceptions such as the person paying fair market value (Excise Tax Act, s. 170). The income tax side of a corporation paying personal costs is in corporation-paid personal expenses.

Mixed-use costs generally give the business share. One exception: no credit at all on property leased or licensed mainly for the personal use of the owner (for a corporation, a shareholder), a partner, or a person related to them, unless the registrant charges that person fair market value (Excise Tax Act, s. 170(1)(c)). A registrant generally claims credits only for the part of the GST/HST that relates to commercial use, by a method that is fair and reasonable and used consistently through the year (CRA: percentage of use). For most registrants, and for operating expenses other than meals and entertainment, the CRA's chart is:

Source: CRA: ITC eligibility percentage. Capital property, passenger vehicles and financial institutions follow other charts. Cars, phones and home offices follow further rules in filing GST/HST and claiming ITCs.

What proof makes a claim stand up, and is a card statement enough?

The registrant needs adequate documentary evidence before it makes the claim in a return (CRA: Input tax credits). A card or bank statement line normally shows the merchant, date and amount, not the tax charged or the supplier's GST/HST number. Because the CRA requires those details from $100 up, a statement alone normally does not support a claim of that size.

If a receipt is missing, ask the supplier for a copy before claiming; the claim window is generally four years. Keep records for 6 years. The full list by sale size is in what a receipt must show; for the income tax side of missing receipts, see business expenses without receipts.

I claimed credits on everything in past returns: what now?

Credits claimed on costs that carry no tax, or on the part the Act cuts, are overclaims. The CRA can generally assess a return up to four years after the later of its due date and the day it was filed (Excise Tax Act, s. 298). That limit does not apply where the person made a misrepresentation attributable to neglect, carelessness or wilful default, or committed fraud (s. 298(4)). Interest runs on an amount not paid when required (s. 280). A penalty applies to a false statement made knowingly or in circumstances amounting to gross negligence: the greater of $250 and 25% of the amount involved (s. 285). Whether a given mistake meets that test depends on the facts.

Tax actually paid to a supplier in error needs a separate check. The CRA's stated practice is to offset a credit claimed on such an amount against the rebate the buyer would otherwise have had, at assessment, without penalty or interest (CRA: Memorandum 8.1, para. 60; Excise Tax Act, s. 296(2.1)). That does not reach a credit software created on tax that was never charged.

To size the problem:

1. List each return period still open to assessment.
2. Pull every cost in the categories above from the ledger for those periods.
3. Work out the credit each should have carried: none where no GST/HST was payable (ordinarily insurance, interest and most bank fees) and none for club dues and personal costs; tax actually charged on a taxable bank or card service may carry a credit. For restricted meals, either 50% claimed with no add-back, or all of it claimed with the add-back made in the right period. Where the rate was wrong, only the payable tax.
4. Compare with the credits claimed on line 106, and check whether the meals add-back on line 104 was ever made.
5. Choose the route for each period. If the CRA has not contacted the business, correcting a filed GST/HST return covers amending, adjusting and fixing on the next return. Whether an overclaim is adjusted on the next return, amended, or raised through a voluntary disclosure depends on its size, the years involved and whether the CRA has made contact (reviews, audits and voluntary disclosure).

If the CRA has already written about the credits, see GST/HST reviews and audits.

Example

These examples use Canadian dollars and figure credits from the actual tax shown on each bill.

Client lunch in Alberta

An Alberta consultant pays C$200 for a client lunch plus C$10 GST, and leaves a C$30 cash tip. The tip carries no GST/HST. Only half of the C$10 is recoverable.

Claiming part each period, the consultant puts C$5 on line 106 and makes no adjustment. Claiming all, the consultant puts C$10 on line 106 and adds C$5 on line 104: in the same fiscal year's return if filing annually, or the next fiscal year's first period if filing monthly or quarterly. Either way the net credit is C$5.

In the books the lunch is C$235 of meals expense (C$200 + C$30 tip + the C$5 of GST not recovered), C$5 of GST recoverable and C$240 paid. Claiming all the GST instead, C$10 is recoverable during the year and the C$5 added back is booked as meals expense.

Insurance and bank fees in Ontario

An Ontario shop pays a C$1,200 insurance premium and C$40 a month in bank fees. No HST appears on either, so no credit is claimed. If the software coded them as taxable, it created a credit on tax that was never charged. Both costs remain business expenses.

HST charged on a service supplied in BC

An Ontario supplier charges 13% HST (C$130) on a C$1,000 service for a BC business, whose BC address it holds. The service is supplied in BC, where only 5% GST (C$50) is payable. The credit is C$50. The extra C$80 comes back from the supplier as a refund or credit note. If the business had claimed C$130, it adds C$80 to net tax in the period it receives the credit note.

Three years of credits on insurance and meals

An Ontario corporation files annually on the regular method. Its software coded its insurance premium as taxable, creating a C$130 credit each year on tax that was never charged. It also claimed all C$200 of HST on meals each year and never made the add-back of half, C$100.

Each year the credit is overstated by C$130 + C$100 = C$230. Over three open years that is C$690 of net tax, before interest. Whether to correct on the next return or deal with the periods another way depends on the facts and on whether the CRA has already written.

Different for you?

• You claimed credits on these costs in past returns: compare each period with the steps above and see correcting a filed GST/HST return. If the CRA has not contacted you, ask whether a voluntary disclosure fits before correcting (reviews, audits and voluntary disclosure). Several open periods, or a ledger that codes everything as taxable, are where bookkeeping help recodes the costs and sizes the overclaim.
• The CRA has written about your credits: see GST/HST reviews and audits and reviews, audits and voluntary disclosure, and see bookkeeping help with the returns, ledger and receipts at hand.
• Your books are months behind: see catching up on overdue books and see bookkeeping help.
• You use the Quick Method: see the GST/HST Quick Method and Quick Method in the books.
• Your sales are exempt or you buy to make exempt supplies: see exempt, zero-rated and out-of-scope.
• Your corporation books meals or pays personal costs: see meals and entertainment in corporate books and corporation-paid personal expenses.
• You are in Québec, or a province charges its own tax: this page covers the federal GST/HST; see charging GST/HST, PST and QST by province and provincial sales tax.