Input tax credits

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• General operating and overhead expenses
• Capital property
  • Change in use
    • From exempt to commercial use
    • From commercial to non commercial use
• Simplified Method for calculating input tax credits
  • Purchases on which you paid GST
  • Purchases on which you paid HST
  • Step 1 - Eligible purchases
  • Step 2 - Calculating your ITC
  • Step 3

As a non-profit organization that is a GST/HST registrant, you recover the GST/HST you pay or owe on the purchases related to your commercial activities by claiming an ITC. You cannot claim ITCs for the GST/HST you pay or owe on purchases and expenses you sell, use, or consume in the course of your exempt activities.

Examples of goods and services for which you may be able to claim ITCs include the following:

• merchandise you buy to resell;
• items bought to manufacture goods;
• capital property such as office furniture, photocopiers, vehicles, and real property used primarily in commercial activities;
• general operating expenses such as office rent, office supplies, advertising, and utilities to the extent they are for use in commercial activities; and
• equipment rentals of computers, vehicles, and photocopiers to the extent they are for use in commercial activities.

There are some purchases and expenses for which you cannot claim an ITC such as:

• certain capital property (for more information, see "Capital property");
• taxable goods and services bought or imported to provide exempt goods and services;
• membership fees or dues to any club whose main purpose is to provide recreation, dining, or sporting facilities (including fitness clubs, golf clubs, and hunting and fishing clubs), unless you acquire the memberships to resell in the course of your business; and
• goods or services you bought or imported for the personal consumption, use, or enjoyment of a member.

Some non-profit organizations can claim a rebate to recover part of the GST/HST paid on expenses for which they cannot claim ITCs. For more information on rebates, see "Public service bodies' rebate".

There are special rules for non-profit organizations that are financial institutions. Call us for more information.

Most registrants claim their ITCs when they file their GST/HST return for the reporting period in which they made their purchases. However, you can claim your ITCs in any subsequent return filed by the due date of the return for your last reporting period that ends within four years after the end of the reporting period in which the ITC could have first been claimed.

The time limit for claiming ITCs for a reporting period is reduced from four to two years for non-profit organizations with annual taxable supplies of more than $6 million for each of the two preceding fiscal year.

However, the two-year limit does not apply to non-profit organizations whose supplies of goods and services (other than financial services) during either of the two preceding fiscal years are at least 90% taxable supplies. These NPOs would have four years to claim their ITCs.

Under the two-year limit, you can claim your ITCs in any subsequent return that is filed within two years of the end of the fiscal year that includes the return in which the ITC could have first been claimed.

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General operating and overhead expenses

General operating and overhead expenses are expenses you have in the day-to-day operation of your business. These expenses include management, administration, and other support functions of the business, commercial leases, equipment rentals, as well as office supplies such as computer disks, paper, and pens. To determine if you can claim an ITC on a general operating or overhead expense, follow these rules:

• If the commercial use is 10% or less, you cannot claim an ITC.
• If the commercial use is more than 10% but less than 90%, base your ITC on the percentage used in commercial activities.
• If the commercial use is 90% or more, you can claim a full ITC.

The method you use to apportion consumption or use between taxable and exempt activities, must be fair and reasonable and be used consistently throughout the year. For example, a method commonly used is the number of square meters of space used in commercial activities relative to the total space of the building. You can also use other objective measures based on time allocation, cost, and revenue earned.

If you can attribute an expense directly to a specific use (taxable or exempt), you should use the direct attribution method. If an expense is used exclusively in the course of commercial activities, you can claim a full ITC for this expense. On the other hand, if an expense is used exclusively in exempt activities, you cannot claim an ITC for this expense. The other expenses that cannot be attributed to one type of activity (they are used in both taxable and exempt activities) can be apportioned by using one of the other methods discussed above.

Capital property

Special rules exist for calculating ITCs for capital property. Capital property for GST/HST purposes is based on the meaning of the term for income tax purposes. It is:

• any depreciable property. This means property that is eligible or would be eligible for capital cost allowance for income tax purposes; and
• any property, other than depreciable property, from which any gain or loss if you disposed of the property would be a capital gain or capital loss for income tax purposes.

Capital property is property you buy for investment purposes or to earn income. There are two types of capital property: capital personal property and capital real property. Capital personal property includes computers, photocopiers, office furniture, cash registers, equipment, and machinery. Capital real property includes land and buildings. For non-profit organizations and other public service bodies that are not financial institutions, the same rules (known as the primary use rule) apply for both types of capital property:

• If the commercial use is more than 50%, you can claim a full ITC.
• If the commercial use is 50% or less, you cannot claim an ITC.

You may elect to have certain exempt supplies of real property treated as taxable. If you file this election, do not use the primary use rule. Instead, calculate ITCs for capital real property in the same way as you calculate ITCs for general operating and overhead expenses

Change in use

The use of the property may change over the years. You have to apply the change-in-use rules in the following situations:

• Your capital property that was used more than 50% in commercial activities is now used 50% or more in non-commercial activities.
• Your capital property that was used 50% or more in non-commercial activities is now used more than 50% in commercial activities.

In each situation, you have to determine the basic tax content of the property when the change occurs. If you change the use, for example, from primarily (more than 50%) non-commercial to primarily commercial, you can claim an ITC to recover all or part of the GST/HST you paid when you bought the property. However, if you change the use from primarily commercial to primarily non-commercial, you will have to remit all or part of the ITC you claimed when you bought the property.

We have simplified the basic tax content formula to accommodate most situations encountered by registrants, including non-profit organizations. However, there are situations where this formula might not work, for example if you are a financial institution. Call us if you need more information.

The basic tax content formula that covers most situations for non-profit organizations is as follows:

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From non-commercial to commercial use

When you buy capital property for use 50% or more in non-commercial activities, you cannot claim ITCs to recover the GST/HST you paid. However, if you later change the use of the property from non-commercial to primarily commercial activities, we consider you to have sold the property, reacquired it, and paid GST/HST at that time. This means you can claim an ITC based on the basic tax content of the property at that time.

From commercial to non-commercial use

If you change the use of the property from primarily commercial to 50% or more non-commercial activities, you have to self-assess and pay part or all of the GST/HST you claimed as an ITC when you bought the property. The tax you have to account for is based on the basic tax content of the property at that time and has to be included in your net tax calculation.

As explained in the section "Public service bodies' rebate", you are not entitled to claim a 50% rebate in relation to this amount of tax since the basic tax content formula takes into account the public service body (PSB) rebate you would have claimed.

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Simplified Method for calculating input tax credits

The Simplified Method is an alternative way of calculating your ITCs. It does not affect the way you charge, collect, or report GST/HST on supplies. Under the Simplified Method for claiming ITCs, you do not have to show GST/HST separately in your records. You only need to total the amount of taxable purchases for which you can claim an ITC. However, you have to keep the usual documents to support your ITC claims for audit purposes.

You can use the Simplified Method if you are registered for GST/HST and you meet the following four conditions:

• You (and your associates) have annual taxable supplies of $500,000 or less in your last fiscal year (not including supplies of financial services, sales of capital real property, and payments for goodwill) if you are in your first fiscal quarter. If you are not in your first fiscal quarter, annual taxable supplies should not be more than $500,000 in your last fiscal quarters of the current year.
• Your taxable purchases (and those of your associates) either in Canada or imported into Canada were not more than $2 million in the last fiscal year (not including zero-rated purchases).
• It is reasonable to expect that your taxable purchases (not including zero-rated purchases) for your next fiscal year will not be more than $2 million.
• You are not a listed financial institution.

If you qualify, you can start using the Simplified Method at the beginning of any reporting period. You do not have to file any forms with us if you decide to use this method, but you have to use it for at least one year if you continue to qualify.

You can only claim ITCs for purchases you use to provide taxable supplies. If you use the purchases for personal use or to provide both taxable and exempt supplies, you must apportion the purchases and claim ITCs only on the part that applies to commercial activities.

You have to separate your GST taxable purchases from your HST taxable purchases if you make purchases in both participating and non-participating provinces.

To calculate your ITCs for each reporting period, total your taxable purchases, including GST or HST, provincial sales tax (PST), tips, and penalty and interest on late payments.

Purchases on which you paid GST

GST at the rate of 6%:

To calculate your ITCs, multiply by 6 the total amount (including GST) of your eligible taxable purchases and divide the resulting amount by 106:

GST at the rate of 7%:

To calculate your ITCs, multiply by 7 the total amount (including GST) of your eligible taxable purchases and divide the resulting amount by 107:

Purchases on which you paid HST

HST at the rate of 14%:

To calculate your ITCs, multiply by 14 the total amount (including HST) of your eligible taxable purchases and divide the resulting amount by 114:

HST at the rate of 15%:

To calculate your ITCs, multiply by 15 the total amount (including HST) of your eligible taxable purchases and divide the resulting amount by 115:

To calculate your ITCs using the Simplified Method, follow these steps:

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Step 1 - Eligible purchases

Add up separately your business purchases and expenses that are taxable at 6% and 7% GST and 14% and 15% HST and for which you can claim an ITC. Your totals will include:

• GST or HST;
• Non-refundable provincial sales taxes and other provincial taxes (only for 6% and 7% GST-taxable purchases);
• taxes or duties paid on imported goods;
• reasonable tips;
• reimbursements paid for taxable expenses incurred by employees and partners; and
• interest and late penalty charges related to purchases taxable at 6% and 7% or 14% and 15%.

Do not include:

• expenses on which you have not paid GST/HST such as salaries, insurance payments, interest, exempt or zero-rated purchases, and purchases from a non-registrant;
• purchases you made outside Canada that are not subject to GST/HST;
• real property purchases;
• rebatable or refundable provincial sales tax;
• purchases for which you are not entitled to claim an ITC such as:
  • the portion you use for personal use or to provide exempt goods and services;
  • capital personal property that you do not use more than 50% in your commercial activities; and
  • the portion of the cost of a passenger vehicle that exceeds the capital cost limitation for income tax purposes;
• 50% of the meal and entertainment expenses (you may include 100% of the expenses and make the 50% adjustment at the end of your fiscal year); or
• amounts paid or payable in reporting periods before you started using the Simplified Method to calculate your ITCs.

Step 2 - Calculating your ITC

Multiply your total taxable purchases from step 1 by 6/106 or 7/107 for GST purchases or 14/114 or 15/115 for HST purchases.

Step 3

Add the following amounts, if they apply, to your ITC amount calculated in step 2:

• ITCs for the GST/HST you paid or owe on real property purchases. To determine the ITC you can claim for real property purchases, see "Real Property";
• GST/HST you had to self-assess on goods and services you imported; and
• ITCs that you did not claim before you started using the Simplified Method, as long as the time limit for claiming them has not expired.

The following example shows how to calculate ITCs using the Simplified Method.

If you need more information on the Simplified Method for calculating ITCs, see our guide RC4022, General Information for GST/HST Registrants.

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