Canada Revenue Agency Auditors Concerned About Registrants Overclaiming Input Tax Credits
Based on personal experience and not any official report from the Canada Revenue Agency ("CRA"), it is obvious to sales tax professionals that the CRA are concerned about goods and services tax ("GST") and harmonized sales tax ("HST") registrants over claiming input tax credits.
On a GST/HST return for a reporting period, the registrant must report the amount of GST/HST collected during the reporting period on its taxable sales. However the registrant remits "net tax" after adding amounts it must add and deducting amounts it may deduct. One of the most important category of deductions from GST/HST collected is input tax credits being claimed. The more input tax credits, the less GST/HST that must be remitted (and in some cases, the larger the refund cheque).
The most obvious concern to CRA auditors is that GST/HST registrants claim false input tax credits when they file their GST/HST returns. False claims are when a person did not actually purchase a business input and are making up a deduction.
One of the most common audit issues if failure to maintain records relating to input tax credits that meet the documentary requirements of subsection 196(4) of the Excise Tax Act (Canada) and the Input Tax Credit Information (GST/HST) Regulations. The CRA will reject input tax credits when the documents to support the claims are not available or if the documents do not contain all the relevant information (e.g., the GST/HST number of the supplier).
Another common audit issue is that the input tax credit is claimed too early (and, therefore, in the incorrect reporting period. For example, a business files monthly returns. A business buys a building on March 2nd. If the registration claims the input tax credit for that building purchase in the February GST/HST return, the input tax credit will be denied and moved to March.
The last two areas of concern are often a source of frustration for businesses. Honest business owners can get caught. They are not the bad guys who are essentially stealing money by making false claims. They are often busy and do not have the best record-keeping systems or do not have the time to chase down a supplier for information after the goods/services are provided and the money has been paid. They do not pour over every detail on a piece of paper because hey know what transaction transpired.
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity Tax
