BUSINESSES CLAIMING GST — HOW TO GUARANTEE AN AUDIT
If you operate a business (whether personally or in a corporation), you are likely claiming GST/HST input tax credits (ITCs) to recover GST or HST that the business pays on purchases.
If you are not collecting and remitting GST or HST that exceeds these ITCs, then you will be claiming a “net tax refund” — in other words, asking the CRA (or Revenu Québec, in Quebec) to write your business a cheque.
There is nothing wrong with claiming a net tax refund, provided the business is entitled to one. Be aware, however, that claiming a refund that exceeds a basic threshold will trigger a CRA audit. You will get a letter from a “GST/HST Refund Integrity Officer” seeking copies of invoices documenting the GST or HST that you have paid, as well as an explanation as to why you have not collected GST/HST that exceeds your ITC claims.
There can be good reasons for a business to get net tax refunds every year or even every month. These are, in general:
• The business’s sales are primarily exports of goods to outside Canada.
• The sales are primarily services provided to non-residents of Canada.
• The sales are primarily zero-rated goods, such as basic groceries, medical devices, certain drugs or certain farm equipment.
• The sales are primarily to status Indians and delivered to a reserve, in circumstances where no GST/HST applies.
• The sales are primarily to a provincial or territorial government that has not agreed to pay GST/HST on its purchases, so no GST is being charged (Alberta, Saskatchewan, Manitoba, Yukon or Northwest Territories).
• Expenses are incurred primarily with HST paid at 13% or 15%, while most of the sales are to the GST-only provinces (BC, AB, SK, MB), or the territories, with GST collected at only 5%.
• The business is a startup with high capital purchases, such as equipment.
• The business is losing money, with expenses exceeding sales.
However, to obtain your net tax refunds you must prove the entitlement to the CRA auditor. This means showing invoices that meet all the documentary requirements for the GST/HST (such as showing the supplier’s GST number, and in most cases being addressed to your business). This also means explaining why your business has not collected more GST or HST than it has paid out, and how this complies with the law.
For example, businesses that supply “exempt” (not zero-rated) services or property are not entitled to ITCs for GST/HST paid on the costs of making those supplies. This includes residential landlords, certain health care providers, certain education providers, child-care services, and businesses supplying financial services, among others.