Accounting for GST

Collecting GST/HST

As a GST/HST registrant, you are responsible for collecting GST or HST from your customers when you sell or provide taxable goods and services in Canada. You hold this tax in trust until you remit it to CRA.

Informing your customers
You need to let your customers know if GST/HST is being applied to their purchases. For taxable supplies (other than zero-rated supplies), you have to either:

• indicate that the total amount paid or payable for a supply includes the GST/HST payable for that supply; or
• indicate the following amounts separately:
• the amount paid or payable by the customer for the supply; and
• the amount of GST/HST paid or payable for the supply in a way that clearly indicates the amount of tax.

Where you choose to indicate the tax payable or the tax rate on invoices, receipts, or written contracts, you have to indicate:

• the total dollar amount of the tax payable; or
• the 5% GST rate or the 13% HST rate that applies to the supply. This means that if HST applies to the supply, do not indicate the federal and provincial parts of HST separately. You have to indicate the total HST rate of 13%.
  You can use cash register receipts, invoices, or contracts to inform your customers, or you can post signs at your place of business.

Sales invoices for GST/HST registrants
In addition to the general rules described above, you have to give customers who are GST/HST registrants specific information on the invoices, receipts, contracts, or other business papers that you use when you supply taxable goods and services. This information allows them to substantiate their claims for ITCs or rebates for the GST/HST you charged. Similarly, when you make business purchases, the invoices from your suppliers will substantiate your claims for ITCs. If your customers ask you for an invoice or receipt for purposes of claiming ITCs, you have to give them specific information, depending on the amount of the sale.

For details of the information required, see the following chart.

Note: Intermediary of a person for a particular supply means a registrant who, under an agreement with the person, causes or facilitates the making of the supply by the person.

Provincial sales tax (PST)
When you have to charge GST and PST, calculate GST on the price excluding PST. For more information on how to calculate PST, contact your provincial sales tax office. Remember, in the participating provinces, HST includes both the federal and provincial parts.

Rounding off fractional amounts

Round off GST/HST to the nearest cent:

• if the amount is less than half a cent, round down; or
• if the amount is equal to or more than half a cent, round up.

If your customer is buying more than one item and tax applies at the same rate on all items, you may total the prices of all taxable goods and services, calculate the GST/HST payable, and then round off the amount.

Early-payment discounts and late-payment surcharges

If you offer an early-payment discount on credit sales, you have to charge GST/HST on the full invoice amount even if your customer takes the discount. When you invoice an amount that is already net of the early payment discount, charge GST/HST on the invoiced amount.

Example 1
You operate a business in Manitoba. You issue an invoice that shows the price of goods as $100, plus GST. The credit terms of the invoice give the customer a 2% discount if the customer pays within 10 days.

Your customer pays within 10 days. You calculate the amount owed as follows:
Purchase price:......................... $100
GST ($100 × 5%)......................... $5
Less: Discount:............................ $2
Customer pays:......................... $103

Example 2
You send a customer an invoice with instructions to pay $100 plus tax if payment is made by March 23, or to pay $110 plus tax if payment is made after March 23. You charge GST/HST on the reduced invoiced amount of $100, even if the customer makes the payment after the March 23 due date.
Late payment surcharges

If you charge late-payment surcharges, you do not charge GST/HST on the surcharge. GST/HST is payable only on the original invoiced amount.

Example
You operate a business in Manitoba. You issue an invoice that shows the price of goods as $100, plus GST. Your customer pays after the due date. If you charge $5 for late payment of goods invoiced at $100, GST does not apply to the late charge. You calculate the amount owed as follows:
Purchase price:.......................... $100
GST ($100 × 5%).......................... $5
Add: Surcharge:............................ $5
Customer pays:.......................... $110

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Volume discounts
When you offer volume discounts to reduce the sale price, you can reduce the GST/HST payable. If you offer your customers volume discounts--that is, you reduce the price if they buy a certain quantity of goods--the amount of GST/HST you charge depends on whether you offer the discount at the time you make the sale or after you make the sale.

At the time of sale
If you offer a discount at the time of sale, you collect GST/HST on the net amount--the sale price less the discount. The following sample invoice shows how to treat a volume discount at the time of sale.

Dodd Company
123 ABC Street
Edmonton AB T0K 2B2

Sold To: Flint Company
Date: May 3, 2008
Business Number: 123456789

Description Amount Net amount
10 tables @ $150.00 ea. $1,500.00
Volume discount (10%)

(150.00) $1,350.00
40 chairs @ $50.00 ea. 2,000.00
Volume discount (10%)

(200.00) 1,800.00
Lamp 75.00 75.00
Subtotal $3,225.00
GST ($3,225 × 5%) 161.25
Total $3,386.25

Terms of payment: Net 30 days

After the sale
Some businesses give volume discounts after they make the sale and collect or charge GST/HST. The customer usually earns this type of volume discount over a period of time (e.g., over a year) and not on a sale-by-sale basis. In this case, you have to choose whether or not to credit the GST/HST related to the amount of the discount.

If you choose to adjust, refund, or credit GST/HST for the volume discount amount and the customer is a registrant, you have to issue a credit note to the customer to explain the adjustment, which is the discount and the related amount of GST/HST. Alternatively, the customer can issue a debit note to you to indicate the adjustment. Treat credit or debit notes for this purpose the same way as you treat credit or debit notes for returned goods (see "Returnable containers").

If you charge or collect GST/HST on a sale and later offer a price reduction or volume discount, you can deduct the amount of GST/HST you adjust, refund, or credit to the customer when you calculate your net tax on your GST/HST return. You can make this adjustment only if you included the GST/HST charged in your net tax calculation for a previous reporting period. Your customer will have to repay any rebate claimed or add the amount of GST/HST adjustment to his or her net tax if an ITC or rebate was claimed for the amount.

If you choose not to adjust the amount of GST/HST you charged, you do not have to adjust your net tax calculation. This is sometimes done when the customer is a GST/HST registrant and has already claimed an ITC. Any price reduction you make does not include a refund, adjustment, or credit of GST/HST, and you or the customer do not have to issue a credit or debit note for GST/HST purposes or make any adjustment on your GST/HST return.

Input Tax Credits

As a registrant, you recover the GST/HST you paid or owe on your purchases and expenses related to your commercial activities by claiming an ITC on line 106 of your GST/HST return.

If you keep track of the GST/HST you paid or owe by adding a column for GST/HST to the purchases and expenses side of your records, total this column to calculate your ITCs for each reporting period. For example, Gilson Company calculates that it paid GST during April as shown in the following charts.

Gilson Company
Purchases and expenses for April 2008

If you use double-entry accounting, you can keep track of your ITCs by creating an account called "input tax credits" or "GST/HST paid." You would debit this account with the amount of GST/HST you paid or owe on your purchases and expenses.

You can claim ITCs only to the extent that your purchases and expenses are for consumption, use, or supply in your commercial activities (that is, in making taxable supplies).

However, there are some purchases and expenses for which you cannot claim an ITC, such as:

• certain 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 your personal consumption, use, or enjoyment.

To claim an ITC, the expenses or purchases must be reasonable in quality, nature, and cost in relation to the nature of your business. Also, an ITC must be based on a reasonable purchase price.

If you are a new registrant, you may be able to claim an ITC for the GST/HST you paid or owe on goods such as capital property and inventory that you have on hand on the day you register. For more details, see "New registrants".

Claiming your ITCs
Most registrants claim their ITCs when they file their GST/HST return for the reporting period in which they made their purchases. However, you may have ITCs that you did not claim when you filed the return for the corresponding reporting period.

If so, you can claim those ITCs in a future GST/HST return as long as it is 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 ITC could have first been claimed.

To support your claim for ITCs, the invoices or receipts you use must contain specific information. See the chart for details on what is required.

Example
You are a quarterly filer and you buy office furniture in the reporting period October 1, 2007, to December 31, 2007, for which you can claim an ITC. The due date of the return for this reporting period is January 31, 2008.

You have up to four years from January 31, 2008, to claim ITCs for tax that was paid or that became payable in the October 1 to December 31, 2007, reporting period. This means that you can claim those ITCs in any following return due to be filed before January 31, 2012.

The time limit for claiming ITCs for a reporting period is reduced from four to two years for:

• listed financial institutions; and
• persons with annual taxable supplies of goods and services of more than $6 million for each of the two preceding fiscal years.

However, the two-year time limit does not apply to the following persons even if they fall into the second category listed above (these persons have four years to claim their ITCs):

• charities; and
• persons whose supplies of goods and services (other than financial services) during either of the two preceding fiscal years are at least 90% taxable supplies.

Under the two-year limit, you can claim your ITCs in any future 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.

Example
You are a monthly filer with a fiscal year-end of December 31. You buy goods in the reporting period September 1, 2008, to September 30, 2008, for which you can claim an ITC. The fiscal year that includes the September 2008 return ends on December 31, 2008. You can claim the ITC in any subsequent return until December 31, 2010.

Operating expenses
Examples of operating expenses for which you may claim an ITC are: commercial rent, equipment rentals, advertising, utilities, and office supplies such as postage, computer disks, paper, and pens.

If you intend to use at least 90% of an operating expense for your commercial activities, you can claim a full ITC for the GST/HST you pay on that expense.

If you intend to use at least 90% of an operating expense for an exempt activity, you cannot claim an ITC for the GST/HST you pay on that expense. For example, if you hire a waste disposal company to remove refuse from an apartment building that you rent out (an exempt activity), you cannot claim an ITC for the GST/HST you pay to the waste disposal company.

Exception
Financial institutions must use 100% of an expense in commercial activities before they can claim a full ITC. But, they can claim a partial ITC even where they use less than 10% of an expense in commercial activities.

If you provide both taxable and exempt goods and services and you cannot attribute at least 90% of an expense to a taxable or exempt activity, you can only claim ITCs for the part of the expense you use in your commercial activities.

Example
You own a building in Nova Scotia where you operate your retail store (a commercial activity), and you rent an apartment on the upper floor to a residential tenant on a long-term basis (an exempt activity). The rent includes utilities. Your utility bill for the building that is used for both commercial and exempt activities includes $80 HST. If you determine that 70% of the utility bill relates to the store and 30% to the apartment, you can claim an ITC for 70% of the HST you pay on your utility bill:

$80 × 70% = $56

The method you use to determine the percentage of operating expenses you use in commercial activities has to be fair and reasonable and used consistently throughout the year. For example, a method commonly used is the number of square metes of space used in commercial activities relative to the total space of the building

Meal and entertainment expenses
You can claim an ITC for the GST/HST you pay on reasonable meal and entertainment expenses that relate to your commercial activities by using, in most cases, the same limitation rules as those for income tax purposes. When the deduction for income tax purposes is limited to 50% of the cost of meals and entertainment, then 50% of the GST/HST you pay on those expenses qualifies for an ITC.

You can choose one of the following two ways to calculate your ITCs for meal and entertainment expenses:

• You can claim 100% ITCs for these expenses throughout your fiscal year. If you file monthly or quarterly GST/HST returns, add the 50% adjustment for the excess ITCs you claimed during the year to your net tax calculation for the first reporting period after the end of your fiscal year. If you file annually, add the 50% adjustment to your net tax calculation for that fiscal year. Enter the adjustment on line 104 of your GST/HST return.
  
• You can claim 50% of the actual GST/HST you pay on these expenses during each reporting period. By choosing this method, you do not have to make any adjustments at the end of your fiscal year.
  
• You can claim an ITC for the GST/HST you reimburse to your employees and partners for meal and entertainment expenses they incurred in Canada. However, these expenses are also subject to the 50% limit.

Employee, partner, and volunteer expenses Reimbursements

Reimbursements

You can generally claim ITCs for the GST/HST included in reimbursements you pay to your employees or partners for expenses they incurred in Canada on your behalf for your commercial activities. If you are a charity or public institution, you can also claim ITCs for the GST/HST included in reimbursements you pay to your volunteers.

You can choose one of the following methods to calculate your ITCs:

Method 1

Calculate an ITC for a reimbursement you paid on or after January 1, 2008, as follows:

* if 90% or more of the total amount you reimbursed for expenses was charged GST, multiply by 4/104; or
* if 90% or more of the total amount you reimbursed for expenses was charged HST, multiply by 12/112.

Calculate an ITC for a reimbursement you paid on or after July 1, 2006, but before January 1, 2008, as follows:

* if 90% or more of the total amount you reimbursed for expenses was charged GST, multiply by 5/105; or
* if 90% or more of the total amount you reimbursed for expenses was charged HST, multiply by 13/113.

Calculate an ITC for a reimbursement you paid before July 1, 2006, as follows:

* if 90% or more of the total amount you reimbursed for expenses was charged GST, multiply by 6/106; or
* if 90% or more of the total amount you reimbursed for expenses was charged HST, multiply by 14/114.

Method 2

Determine the actual GST or HST you incurred on reimbursed expenses using the following formula:

A × B

A is the GST/HST paid by the employee, partner, or volunteer on the goods or services;

B is the lesser of the following amounts:

* the percentage of the cost to the employee, partner, or volunteer that you reimburse (reimbursement divided by cost); and
* the extent to which the employee, partner, or volunteer acquired, imported, or brought into a participating province the goods or services for consumption or use in relation to your commercial activities.

In the following example, we are using the GST rate of 5%.

Example
Your employee incurs an expense of $565 ($500 plus $25 GST and $40 provincial sales tax) for use 100% in your commercial activity. You reimburse your employee $345 for this expense. You can claim an ITC equal to the lesser of the following amounts:

A × B = $25 × ($345 ÷ $565) = $15.27

and

A × B = $25 × 100% = $25

You can claim an ITC of $15.27 for the reimbursement.

The method you choose to calculate your ITCs for reimbursements must be used consistently throughout your fiscal year. For example, if you use method 1 to calculate your ITCs for meal and entertainment expenses reimbursed to one employee, you have to use this method to calculate your ITCs for the same types of reimbursements made to other employees.

Allowances

In general, you can claim an ITC equal to the GST or HST part of a reasonable allowance you pay to your employees or partners (or volunteers if you are a charity or a public institution) if you meet the following conditions:

* the allowance is used to pay for expenses of which 90% or more are incurred in Canada and are charged GST/HST (other than zero-rated);
* the allowance is or would be deductible for income tax purposes; and
* the expenses incurred by your employees, partners, or volunteers would have been eligible for ITCs if you had incurred them.

To claim an ITC for the HST part of the allowance, at least 90% of the expenses must be incurred in participating provinces.

You claim an ITC for a reasonable allowance you paid on or after January 1, 2008, as follows:

* multiply the allowance by 5 and divide the result by 105 for GST; or
* multiply the allowance by 13 and divide the result by 113 for HST.

You claim an ITC for a reasonable allowance you paid on or after July 1, 2006, but before January 1, 2008, as follows:

* multiply the allowance by 6 and divide the result by 106 for GST; or
* multiply the allowance by 14 and divide the result by 114 for HST.

You claim an ITC for a reasonable allowance you paid before July 1, 2006, as follows:

* multiply the allowance by 7 and divide the result by 107 for GST; or
* multiply the allowance by 15 and divide the result by 115 for HST.

A motor-vehicle allowance that is reasonable for income tax purposes also qualifies for an ITC. In order to claim an ITC for the HST part of the allowance, the use of the motor vehicle must be in the participating provinces.

Home office expenses
You can claim ITCs for your home office expenses only if the work space is:

your principal place of business; or
used 90% or more to earn income from your business and used on a regular and continuous basis for meeting your clients, customers, or patients.
This restriction for home office expenses is similar to that used for income tax purposes.

New registrants
If you are a new registrant, you can claim an ITC for the GST/HST you paid or owe on property such as capital property, real property, and inventory that you had on hand to use in your commercial activities at the time you became a registrant. We consider that you bought the property at that time and paid GST/HST equal to the basic tax content of the property. The basic tax content formula is explained in the next section, "Claiming ITCs for capital property."

You can also claim an ITC for any GST/HST you prepaid for rent, royalties, or similar payments that relate to the period after you became a registrant. You cannot claim an ITC for the GST/HST you paid or owe on services or accommodation you consumed, used, or supplied during a period before you became a registrant, even if you paid that GST/HST after you became a registrant.

Example
You prepaid 3 months rent for office space for use in your commercial activities for the period January 1, 2008, to March 31, 2008. If you became a registrant on March 1, 2008, you can claim an ITC for the GST/HST you paid on rent for the month of March. You cannot claim an ITC for the GST/HST you paid for rent from January 1 to February 29, because that amount relates to the period before you became a registrant.

Claiming 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 a 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.

In general, capital property is property you buy for investment purposes or to earn income. It may include:

• real property, such as land or a building (see "Claiming ITCs" for information on claiming ITCs for real property); and
• personal property such as equipment or machinery that you use in your business.

Other examples of capital personal property include:

• photocopiers, computers, and cash registers;
• furniture and appliances used to furnish places such as offices, lobbies, and hotel rooms; and
• free-standing refrigerators, ovens, and other large appliances (built-in appliances are fixtures that are usually considered to be part of the real property).

Note
Capital property for GST/HST purposes does not include property described for income tax purposes in class 12 (such as chinaware, cutlery, or other tableware costing less than $200), class 14 (certain patents, franchises, concessions, or licenses for a limited period), or class 44 (a patent or a right to use patented information for a limited or unlimited period). You can claim ITCs for these items based on the rules for operating expenses.

Capital personal property
The general rules for claiming ITCs for capital personal property such as computers, equipment, and office furniture are as follows:

If you use the capital personal property primarily (more than 50%) in your commercial activities, you can claim a full ITC.
If you use the capital personal property 50% or less in your commercial activities, you cannot claim an ITC.

Example
You buy a computer for $2,000 plus GST/HST. You will use the computer 60% in your commercial activities and 40% for personal use. Since you will use the computer more than 50% in your commercial activities, you can claim an ITC for the full amount of the GST/HST you pay for the computer.

Exception
Financial institutions have to claim their ITCs for capital property based on the actual extent of their use of the property in commercial activities.

Passenger vehicles and aircraft

Corporations follow the above rule for claiming ITCs on passenger vehicles and aircraft.

However, individuals and partnerships have to claim ITCs for passenger vehicles and aircraft based on the capital cost allowance (CCA) claimed for income tax purposes. If the use in commercial activities is less than 10% or more than 90%, see the chart on page 19 for the rules.

You usually calculate your CCA for income tax purposes at the end of your fiscal year.

Once you have calculated your CCA, calculate your ITC by using one of the following formulas:

When your tax year ends on or after January 1, 2008

* CCA × 5/105, if you paid GST on the purchase;
* CCA × 13/113, if you paid HST on the purchase; or
* CCA × 8/108, if you brought the vehicle or aircraft into a participating province.

When your tax year ends after July 1, 2006, and before January 1, 2008

* CCA × 6/106, if you paid GST on the purchase;
* CCA × 14/114, if you paid HST on the purchase; or
* CCA × 8/108, if you brought the vehicle or aircraft into a participating province.

When your tax year includes July 1, 2006

* CCA × 6.5/106.5, if you paid GST on the purchase;
* CCA × 14.5/114.5, if you paid HST on the purchase; or
* CCA × 8/108, if you brought the vehicle or aircraft into a participating province.

When your tax year ends before July 1, 2006

* CCA × 7/107, if you paid GST on the purchase;
* CCA × 15/115, if you paid HST on the purchase; or
* CCA × 8/108, if you brought the vehicle or aircraft into a participating province.

Example
You are self-employed and use your vehicle in your commercial activities and for personal use. The use in commercial activities is 60%. The CCA that you claimed for income tax purposes for your vehicle is $3,000. The ITC you can claim is as follows:

When your tax year ends on or after January 1, 2008

* $3,000 × 5/105 = $142.86, if you paid GST
* $3,000 × 13/113 = $345.13, if you paid HST

When your tax year ends after July 1, 2006, and before January 1, 2008

* $3,000 × 6/106 = $169.81, if you paid GST
* $3,000 × 14/114 = $368.42, if you paid HST

When your tax year includes July 1, 2006

* $3,000 × 6.5/106.5 = $183.10, if you paid GST
* $3,000 × 14.5/114.5 = $379.91, if you paid HST

When your tax year ends before July 1, 2006

* $3,000 × 7/107 = $196.26, if you paid GST
* $3,000 × 15/115 = $391.30, if you paid HST

Musical instruments

If you are a registered individual or member of a partnership and you use a musical instrument for employment purposes or in a business carried on by the partnership, we consider that use to be in your commercial activities, and you can follow the general rules for claiming ITCs for capital personal property.

Change-of-use rules for capital personal property

From non-commercial to commercial use

When you change the primary use of capital personal property from non-commercial to commercial, 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.

We have simplified the basic tax content formula to accommodate most registrants. It may not apply to some registrants such as selected listed financial institutions. Call us if you need more information.

The basic tax content formula is as follows:

(A - B) × C

A is the GST/HST payable at last acquisition and the GST/HST payable on improvements to the property;

B is any rebate or refund you are entitled to (not including ITCs);

C is the lesser of:

* 1; and
* the fair market value of the property at the time of the change in use divided by the cost of the property at the last acquisition of the property and the cost of any improvements to the property.

Note
If your last acquisition of the property and the acquisition of any improvements you made to it, took place:

* after December 31, 2007, A is the GST/HST payable at 5% or 13%;
* after June 30, 2006, and before January 1, 2008, A is the GST/HST payable at 6% or 14%; and
* before July 1, 2006, A is the GST/HST payable at 7% or 15%.

In the following example, we are using the GST rate of 5%.

Example
You operate several commercial and residential rental buildings in Ontario. You pay GST on the purchase of a tractor for use primarily for the residential buildings (non-commercial activity). You cannot claim an ITC for this purchase and you are not entitled to any refunds or rebates.
Cost of tractor $10,000
GST payable ($10,000 × 5%) $500

Later, you change the primary use of the tractor to the commercial buildings (commercial activity). If the fair market value of the tractor was $7,000 when you changed the use, you can claim an ITC based on the basic tax content of the tractor at the time of the change in use as follows:
Basic tax content = (A - B) × C
= ($500 - $0) × ($7,000 ÷ $10,000)
= $350

Enter this amount on line 106 of your GST/HST return.

From commercial to non-commercial use

If you change the primary use from commercial to non-commercial, you have to self-assess and pay GST/HST based on the basic tax content of the capital personal property.

Example
You are the operator described in the previous example. After changing the use of the tractor to primarily commercial activities, you now change the use back to primarily non-commercial activities. The tractor's fair market value is now $4,000. You have to add GST based on the basic tax content of the tractor in your net tax calculation as follows:
Basic tax content = (A - B) × C
= ($350 - $0) × ($4,000 ÷ $7,000)
= $200

You add GST of $200 in your net tax calculation because of the change in primary use to non-commercial. Include this amount on line 103 of your GST/HST return.

Capital real property
The rules for claiming ITCs for capital real property, such as a building, depend on whether you are a corporation, a partnership, an individual, a financial institution, or a public service body. See "Real property" for more information.

Simplified Method for claiming ITCs

The Simplified Method for claiming ITCs is an alternative way for eligible registrants to calculate their input tax credits.

When you use the Simplified Method, you do not have to show GST/HST separately in your records. You only need to total the amount of your 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 your annual worldwide revenues from taxable goods and services (including those of your associates) are $500,000 or less in your last fiscal year.

Your total taxable supplies (including those of your associates) for all preceding fiscal quarters of the current fiscal year must also be $500,000 or less. These limits do not include goodwill, zero-rated financial services, or sales of capital real property.

Also, you must have $2 million or less in taxable purchases made in Canada in your last fiscal year to qualify to use this method. The $2 million purchase limit does not include zero-rated purchases, but includes purchases imported into Canada or brought into a participating province.

If you are a public service body, you must be able to reasonably expect that your taxable purchases in the current fiscal year will not be more than $2 million.

Exception
Listed financial institutions cannot use the Simplified Method to calculate ITCs.

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

How does the Simplified Method work?
If you make purchases in both participating and non-participating provinces, you have to separate your purchases that are taxable at the GST rate from those taxable at the HST rate.

You can use the Simplified Method to calculate ITCs only for purchases you use to provide taxable goods and services. If you use your purchases for personal use, or to provide both taxable and exempt goods and services, only the portion used for providing taxable goods and services can be included in the ITC calculation. If you use a purchase at least 90% to provide taxable goods and services, you can include the total purchase price in your ITC calculation.

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

Step 1

Add up your business expenses for which you can claim an ITC. When you make purchases in both participating and non-participating provinces, you have to separately add up your purchases that are taxed at 5%, 6%, 7%, 13%, 14% and 15%.

Include capital personal property purchases and improvements to such property if you use the property more than 50% in your commercial activities. Your totals will include:

• GST or HST;
• non-refundable PST (only for GST-taxable purchases);
• taxes or duties on imported goods;
• reasonable tips;
• interest and late penalty charges related to purchases taxable at GST or HST; and
• reimbursements paid to employees, partners, and volunteers for taxable expenses.

Do not include:

• expenses on which you have not paid GST/HST such as employees' salaries, insurance payments, interest, exempt or zero-rated purchases, and purchases from a non-registrant;
• purchases you made outside Canada which are not subject to GST/HST;
  real property purchases;
• refundable or rebatable PST;
• purchases for which you are not entitled to claim an ITC such as:
  the part 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 part of the cost of a passenger vehicle that exceeds the capital cost limitation for income tax purposes (for more information, see the preceding chart);
• 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);
  if you are an individual or a partnership, passenger vehicles or aircraft you bought or imported that you will not use 90% or more in commercial activities; and
• amounts paid or payable in reporting periods before you started using the Simplified Method to calculate your ITCs.

Note
If you also use the Quick Method of accounting, only include business purchases for which you are entitled to claim ITCs, such as purchases of capital equipment.

Step 2

Multiply the amount(s) you calculated in step 1 by:

5 and divide the result by 105 for purchases on which you paid 5% GST
6 and divide the result by 106 for purchases on which you paid 6% GST;
7 and divide the result by 107 for purchases on which you paid 7% GST;
13 and divide the result by 113 for purchases on which you paid 13% HST;
14 and divide the result by 114 for purchases on which you paid 14% HST; and
15 and divide the result by 115 for purchases on which you paid 15% HST.

Step 3

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

ITCs you did not claim before you started using the Simplified Method, as long as the time limit for claiming them has not expired;
ITCs for the GST/HST you paid or owe on real property purchases. See "Claiming ITCs" to find out the ITC you can claim for real property purchases; and
if you are an individual or a partnership, the ITC you may claim for a passenger vehicle or an aircraft used less than 90% in your commercial activities.
Enter this total on line 106 of your GST/HST return.

The following example shows you how to calculate your ITC for various purchases and expenses step by step.

Example (includes 5% GST and 8% PST)
Description Expenses *
Rent $ 1,070
Employees' salaries ** 3,000
Insurance ** 50
Capital property used more than 50% in commercial activities 575
Advertising 214
Office supplies 230
Inventory purchases 1,150
Land *** 21,400
Total purchases and expenses $27,689
* Includes GST and any non-refundable PST.
** GST does not apply.
*** Does not include any PST.

Step 1
Add all purchases and expenses including GST and PST $27,689.00
Subtract employees' salaries, insurance,
and land ($3,000 + $50 + $21,400) ($24,450.00)
Taxable expenses $3,239.00

Step 2
Multiply taxable expenses by 5/105
($3,239 × 5/105) $154.24

Step 3
ITCs on taxable expenses $ 154.24
Add ITC on land ($21,400 × 5/105) 1,019.05
ITC $1,173.29

Submit your GST Registration online