As your small business grows, you may need to register for, charge, and remit the GST/HST if you haven’t already registered voluntarily. Recovering the taxes you pay on purchases you make for your business represents an important part of the GST/HST system. The Canada Revenue Agency refers to the sales taxes you recover as input tax credits (ITC). An ITC refunds any GST/HST you pay to procure or produce your inventory on hand for use in your business.
How to Claim the ITC for Inventory on Hand
At the end of your GST/HST reporting period, calculate the taxes you collected from your clients, subtract your ITCs, and remit only the net amount to the CRA. Normally, you can only claim ITCs on items you purchase after you register. However, some cases exist where you may be eligible to claim an ITC for the GST/HST paid previously on inventory you have on hand at the time you register your GST/HST account.
The CRA considers the inventory on hand at the time of your registration at its current fair market value rather than the value of the inventory when you purchased or produced it. You may claim an ITC reflecting the GST/HST that would have been paid to you had you sold the inventory on the day you registered the account. Fair market value is the price a normally motivated buyer would pay to a normally motivated seller for something. It’s your responsibility to establish a reasonable fair market value for your inventory and to document how you arrive at that value.
For example, your inventory on hand amounts to 10,000 bricks. On the day you register your account, someone would pay 50 cents per brick, which is the fair market value at the time. The value of your inventory on hand comes to $5,000. The GST comes to 5% of the price, at fair market value, of your bricks. Your GST comes to $250. The ITC you can claim for inventory on hand amounts to $250.
If you’re unsure how much ITC you can claim, the ITC calculator can give you a better idea. Report the ITC figure, and any other ITCs you can claim, on line 108 (or line 106 for paper) on your GST/HST return.
Maximizing your ITCs represents an important aspect of cash flow management, especially for new registrants. You want to claim everything you possibly can to improve the overall financial health of your business. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.