Include HST in expenses or as an ITC
This is my first post, so be gentle :-)
I run a business as a sole proprietor and am registered and collect HST.
I understand form reading the CRA site and many other forums that I have a choice to either include HST in my expenses or claim expenses net of HST and use them as an Input Tax Credit.
1. Can someone please give me some advice as to which method is better in terms of reducing the total tax bill?
2. Is it an all-or-nothing choice or can I include HST in some expenses and not others (understanding that I can't double-claim)? Ex: Include HST in all business-use-of-home expenses but not in vehicle expenses.
Anyone have any thoughts?
It seems to me there really is no choice. Claim the ITCs against HST collected. HST on home office expenses can also be claimed as ITCs. This way you get a full tax credit. Including ITCs as expenses gets you only the marginal tax saving.
Last edited by RussT; 2017-03-11 at 07:41 AM.
I can't say whether you actually have a choice or not but I can assure you that getting your HST all back is significantly better then getting it as a tax deduction by recording it as an expense. The first one gets it all back and the latter only gets back whatever you marginal tax rate is. That rate will be significantly less then 100%. So 100% refund is always better.
Thanks guys... that totally makes sense. I must have been having a senior moment (at age 45 !?). For others that find it as confusing as I did, here's an example that may help:
Assume I have $5k paid in HST that I remove from my business-use-of-home or other eligible expenses and add it to my HST remittance as an ITC. By doing this, I am increasing my net income by $5k and thus will have to pay $1750 more in income tax (assuming 35% marginal rate). At the same time, I am reducing my HST owing by the full $5k since I have $5k more in ITCs. After all is said-and-done, I am richer by $5000 - $1750 = $3250 !
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