If you start a new business (whether personally or in a corporation), you might be 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 (rumoured to be $2,500, but it may vary) will trigger a CRA audit. You will get a letter from a “GST/HST Refund Integrity Officer” seeking invoices documenting the GST or HST that you have paid, as well as an explanation as to why you have not collected GST or HST on sales.
There can be good reasons for a business to get net tax refunds every year or even every month. These include:
- The business’s sales are primarily exports of goods to outside Canada.
- The business’s sales are primarily services provided to non-residents of Canada.
- The business’s sales are primarily zero-rated goods, such as basic groceries, medical devices, certain drugs or certain farm equipment.
- The business’s 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 NWT).
- The business is a startup with high capital purchases, such as equipment.
However, to obtain your net tax refunds you will have to 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.
Very often what happens is that a business claims ITCs without realizing that it is not entitled to them, and filing the net tax refund claim results in the business being assessed for GST or HST that it should have collected and remitted.
For example, businesses that make “exempt” supplies (not zero-rated supplies) are not entitled to input tax credits. This includes residential landlords, certain health care providers, certain education providers, childcare services, and businesses supplying financial services, among others.
So, don’t blindly assume that, because you’re running a business and have been given a GST number, you can claim back all the GST or HST your business pays. Make sure you obtain professional advice about the GST and that you understand the rules. Getting this wrong will usually lead to a very expensive assessment!
You may also wish to review CRA Guide RC4022, “General Information for GST/HST Registrants”.