Using the Simplified Method to Calculate ITCs and ITRs

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To use the simplified method to calculate your input tax credits (ITCs) and your input tax refunds (ITRs), you must first determine the total amount of your taxable purchases on which you paid the GST and QST for the period covered by the return. The total amount must include the GST and QST you paid, and any amount on which you should have paid the taxes.

This amount must also include, where applicable:

  • import taxes or duties;
  • tips paid, provided they are reasonable;
  • expenses incurred for capital property that is personal property (such as office furniture and equipment) that you used more than 50% of the time for your commercial activities, as well as expenses related to improvements made to such property;
  • reimbursements for taxable expenses incurred by employees, partners or volunteers;
  • the portion of the cost of a good or a service that became payable after the effective date of the election to use the simplified method;
  • interest or penalties relating to a late payment for a taxable supply;
  • for purposes of calculating an ITC, the payment of non-refundable provincial sales taxes.

However, do not include the following amounts:

  • expenses on which you did not pay GST or QST (such as payment of salaries or wages, insurance premiums or interest);
  • amounts paid to acquire exempt or zero-rated goods or services;
  • imports that are not subject to GST under the GST system, and property brought into Québec that is not subject to QST under the QST system;
  • passenger vehicles and aircraft used less than 90% of the time by individuals or partnerships in their commercial activities;
  • amounts that were paid or became payable before you began using the simplified method;
  • 50% of meal and entertainment expenses (this does not apply to charities and public institutions);
  • the portion of the capital cost of a passenger vehicle that exceeds the maximum amount that can be deducted for income tax purposes;
  • purchases to supply exempt goods or services;
  • goods or services purchased for personal use;
  • purchases from suppliers who are not registrants;
  • under the GST system, payments of refundable provincial sales taxes, such as the QST;
  • if you are a truck driver, meal expenses for which you cannot claim an ITC or an ITR;
  • GST or QST paid on the purchase of real property;

Calculating ITRs and ITCs

First, determine your total taxable purchases (excluding zero-rated purchases) for which you can claim an ITR under the QST system. Multiply this amount by 9.975/109.975. The result is your ITR for the period.

Next, determine your total taxable purchases (excluding zero-rated purchases) for which you can claim an ITC under the GST system. Subtract the ITR to which you are entitled, and multiply the amount by 5/105. The result is your ITC for the period.

Example

Your business incurs the expenses listed below during the fiscal year. These expenses are all taxable except for salaries and wages, and interest.

Salaries and wages$200.00
Inventory+$345.08
Rent+$230.05
Stationery+$115.03
Interest+$50.00
Office furniture+$230.05
Total expenses$1,170.21
Salaries and wages and interest ($200 + $50)$250.00
Total taxable expenses$920.21

The ITR and ITC are calculated as follows:

  • ITR = $920.21 × 9.975/109.975 = $83.47
  • ITC = ($920.21 − $83.47) × 5/105 = $39.84

The simplified method can be used only for property and services acquired to make taxable supplies. Property that is used to make both taxable and exempt supplies, or that is partly intended for personal use, gives entitlement to an ITC or ITR only for the portion acquired for use in the course of your commercial activities.

Harmonized sales tax (HST)

If you made purchases on which you paid the HST, you must follow the same steps to calculate the ITC to which you are entitled. You must do a separate calculation for each HST rate you paid.

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