Denied Input Tax Credits (ITCs)

Input tax credits are the mechanism that keeps GST/HST from cascading through a supply chain. A registrant who pays GST or HST on purchases acquired for use in commercial activities is generally entitled to recover that tax as an input tax credit (ITC), so that the net tax remitted to the Canada Revenue Agency reflects only the value the business itself added. When the CRA denies ITCs you have claimed, it removes those credits from your net tax calculation and reassesses you for the resulting shortfall, usually with arrears interest and sometimes a penalty added.

What surprises many business owners is how often an ITC is denied even though the GST or HST was genuinely paid on a genuine business expense. The entitlement to a credit under the Excise Tax Act is conditioned on satisfying specific documentary and timing requirements, and a credit that is real in substance can still be disallowed if the paperwork supporting it falls short of what the law prescribes. The pages that follow explain where the right to claim an ITC comes from, what documentation the law actually requires, why the CRA denies credits, the time limits that apply, and how a denial is contested. This is general information about Canadian federal tax law, not legal advice for your situation.

Where the right to an input tax credit comes from

The basic entitlement is found in section 169 of the Excise Tax Act. In general terms, a registrant is entitled to an input tax credit for the GST/HST that became payable on, or was paid on, property or services it acquired or imported, to the extent that the property or services were acquired for consumption, use or supply in the course of the registrant's commercial activities. The credit is therefore tied to two ideas at once: that you are a registrant who paid the tax, and that what you bought was used in making taxable supplies rather than for personal or exempt purposes.

Three points follow from this structure. First, only a GST/HST registrant can claim ITCs, which is why registration status and the timing of registration matter so much. Second, the credit is available only to the extent of commercial use, so a purchase used partly in commercial activity and partly for other purposes must generally be apportioned. Third, the tax must actually have become payable; a credit cannot exceed the tax that was properly charged and paid. These threshold questions are separate from, and in addition to, the documentary requirements discussed below, and the CRA can deny a credit on any of these grounds.

The documentary requirements: subsection 169(4) and the regulations

This is where the largest share of ITC disputes is won or lost. Subsection 169(4) of the Excise Tax Act provides that a registrant may not claim an input tax credit for a reporting period unless, before filing the return in which the credit is claimed, the registrant has obtained sufficient evidence in such form and containing such information as will enable the amount of the ITC to be determined, including any information that may be prescribed. The detail of what must be obtained is set out in the Input Tax Credit Information (GST/HST) Regulations.

The regulations scale the required information to the size of the purchase, using thresholds based on the total amount paid or payable. As the dollar value rises, more information is required. In broad terms:

• For smaller purchases (under the first threshold), the supporting documentation must show the supplier's or intermediary's name (or trading name), the date of the supply or of the invoice, and the total amount paid or payable.
• For mid-range purchases, the documentation must additionally show the supplier's GST/HST registration number and either the amount of tax charged or a statement that the amount paid or payable includes the tax, together with information identifying the applicable rate.
• For larger purchases (at and above the higher threshold), the documentation must further include the name of the recipient (or its trading name or the name of its authorized agent), the terms of payment, and a description of the supply sufficient to identify it.

Two requirements in particular generate the most denials. The first is the supplier's GST/HST registration number: the number must be present, and it must be a number that was in fact validly registered for the supply in question. The second is an adequate description of the supply, because a vague invoice that says only "services rendered" or "consulting" may not, on its own, allow the nature of the supply to be identified. The information must be in a form that enables the credit to be determined, and, critically, it must have been in the registrant's hands before the return claiming the credit was filed.

Why the CRA denies input tax credits

ITC denials cluster around a handful of recurring problems. Understanding which category your denial falls into shapes how it is most effectively addressed.

Missing or invalid supplier registration numbers

A great many denials arise because an invoice does not show the supplier's GST/HST registration number, shows a number that is incomplete or transcribed incorrectly, or shows a number that does not correspond to a valid registration for the supplier at the time of the supply. The CRA can and does verify registration numbers against its own records, and where a supplier was not actually registered, or had its registration cancelled, the recipient's credit can be denied even if an amount labelled as tax was charged and paid. This is one of the harshest features of the system, because the recipient is often not in a position to know the supplier's true registration status.

Inadequate documentation

Even where a supplier was properly registered, the documentation as a whole may not contain all of the prescribed information for the relevant dollar threshold. Common deficiencies include invoices that omit the description of the supply, statements or credit-card slips that lack the supplier's registration number, missing recipient information on larger invoices, or reliance on a quote, purchase order or bank record that is not, by itself, sufficient evidence of the supply. The CRA frequently denies these credits on the basis of subsection 169(4) without disputing that money changed hands.

Non-commercial, exempt, or mixed use

Because the credit is available only to the extent the purchase was used in commercial activities, the CRA denies or reduces ITCs claimed on purchases it views as personal, as relating to exempt supplies, or as only partly commercial. Disputes here often involve a reasonable method of apportionment between commercial and other use, particular expense categories with their own rules, and the question of whether an activity amounts to a commercial activity at all.

Tax not properly payable

An ITC cannot exceed the tax that was actually payable on the supply. Where tax was charged in error, charged at the wrong rate, or charged on a supply that was zero-rated or exempt, the CRA may deny the credit and direct the recipient to seek a refund or adjustment from the supplier instead. The place-of-supply rules can also affect the correct rate, which matters for businesses operating across provincial or national borders; our overview of GST/HST place-of-supply and cross-border issues addresses that dimension.

Timing

Finally, credits are denied because they were claimed too late, or because the prescribed documentation was not obtained before the return was filed. Timing is a frequent and avoidable source of denials, and it is the subject of its own section below.

The time limit to claim an input tax credit

An input tax credit must be claimed within a limitation window, and missing it is generally fatal to the claim. For most registrants, an ITC may be claimed in a return filed by the due date of the return for the last reporting period that ends within four years after the end of the reporting period in which the credit could first have been claimed. In other words, most businesses have a window measured in years, not months, to bring a credit forward, but that window does eventually close.

A shorter limitation period applies to certain registrants. Listed financial institutions and larger registrants whose threshold amounts exceed the prescribed level (broadly, persons other than charities whose threshold amounts exceed the specified figure in the relevant fiscal years) generally have only two years rather than four to claim their credits, subject to the exceptions in the legislation. Because the applicable period depends on the type and size of the registrant, identifying which limitation period governs is an important early step. Separately, subsection 169(4) requires that the prescribed documentation be in hand before the return is filed, so a credit can be lost on timing grounds even within the limitation window if the paperwork was assembled after the fact.

How denied input tax credits are remedied and disputed

A denial is not the end of the matter. Depending on the reason for the denial, there are several routes to a remedy, and they are often pursued together.

Curing the deficiency

Where a credit was denied for inadequate documentation, the first question is whether the deficiency can be cured. It is frequently possible to go back to the supplier and obtain a corrected or more complete invoice, a statement confirming the supplier's registration number, or other records that supply the missing prescribed information. Bank records, contracts, delivery documents and correspondence can corroborate the supply. The objective is to assemble, for each disputed credit, a documentary package that satisfies the regulations for the relevant dollar threshold. Because subsection 169(4) is specific about what must be obtained, this is detailed, invoice-by-invoice work, but it is often the most direct path to restoring a credit.

The notice of objection

ITC denials almost always arrive through a GST/HST audit and a resulting assessment or reassessment of net tax. The formal way to contest that assessment is a notice of objection, which for GST/HST matters must generally be filed within 90 days of the date of the notice of assessment or reassessment, with limited provision for late objections on application. The objection goes to CRA Appeals, a division separate from the auditor who raised the denial. At this stage the focus is on demonstrating that the credits were properly claimed, that the documentation as supplemented meets the prescribed requirements, and that the purchases were used in commercial activities. Our overview of GST/HST audits and disputes and of tax disputes and objections explains the objection process in more detail. Many ITC issues are resolved at this stage once the record is complete.

Appeal to the Tax Court of Canada

If the objection does not resolve the matter, the next step is an appeal to the Tax Court of Canada. The Court hears GST/HST appeals under the Excise Tax Act, and ITC disputes are a common subject of those appeals. Whether the appeal proceeds under the informal or general procedure depends largely on the amount of tax in dispute. The documentary record assembled during the audit and objection stages is decisive at the appeal, which is why the way an audit is handled at the outset can have lasting consequences.

Coming forward voluntarily

If a review of your own records reveals that GST/HST returns were filed incorrectly, whether by overclaiming credits, underreporting tax, or failing to register when required, the Voluntary Disclosures Program may offer a route to correct the filings while seeking relief from penalties and, in appropriate cases, from prosecution. Eligibility is strict and the program is generally unavailable once an audit has begun, so timing is critical. Getting your registration and ongoing filings in order is the other side of the same coin, and our overview of GST/HST registration and compliance addresses how to keep credits supportable going forward.

Keeping your input tax credits defensible

Most ITC denials are avoidable. The practical lessons that emerge from these disputes are consistent: obtain a complete invoice that contains all of the prescribed information for each purchase, and obtain it before you file the return claiming the credit; verify, for significant suppliers, that the GST/HST registration number on the invoice is valid; keep a description of each supply that is specific enough to identify what was bought; apportion mixed-use purchases on a reasonable and documented basis; and claim credits within the applicable limitation period rather than letting them age. Where real estate is involved, the rules carry their own particularities, and our overview of GST/HST on real estate addresses those. Building these habits into your bookkeeping is far less costly than reconstructing the record after a denial.

How Barrett Tax Law approaches this

When we are asked to look at a denied input tax credit, we begin by identifying exactly why the CRA disallowed it, because the remedy differs depending on whether the problem is a missing registration number, an inadequate description, a question of commercial use, the correctness of the tax charged, or timing. We review the audit working papers, the assessment, and the invoices and records behind each disputed credit, and we test the denial against what section 169 and the Input Tax Credit Information Regulations actually require.

From there, we work with you, and where helpful with your accountant or bookkeeper, to cure documentary deficiencies where they can be cured, to establish commercial use where that is the issue, and to frame the objection, and if necessary the appeal to the Tax Court of Canada, around the specific credits in dispute. Because GST/HST denials often arrive alongside other audit adjustments, we also consider how the ITC issue fits with the broader assessment.

Every file is different, and nothing on this page is a prediction about any particular case. If the CRA has denied input tax credits you claimed, or you have received a GST/HST audit proposal that threatens to deny them, you are welcome to contact us for a free, confidential consultation to discuss your situation and the options available to you.