The 7 Most Common HST Audit Issues

Posted on May 27th, 2024 in Domestic Tax

Scrabble letters spelling out the word "audit"

GST/HST (aka Commodity Tax) can be complex and confusing if not dealt with by a knowledgeable professional. Oversights may trigger an audit and unnecessary penalties/interest assessed by the CRA.

We’ve compiled a list of the most common audit issues that we’ve seen below:

Claiming Input Tax Credits (ITCs) without proper documentation (see criteria table for specifics)
• Ensure that the vendor’s GST/HST number is always on the invoice, if not, ask for another to be prepared.
• Do not use credit card statements as your support. It is not considered acceptable proof for the CRA.
• Also, the CRA does not allow amendments where the sole purpose is to claim additional ITCs – any additions must be claimed on a future return.
Invoices made out to the wrong company
• Holding company invoices cannot be claimed by the operating company.
Intercompany transactions – Section 156 elections and form RC4616
• Section 156 elections cannot be filed solely based on a controlling interest.
• Most situations require 90% ownership (parent/sub).
Claiming ITCs when a portion of the related revenue is exempt
• Exempt income does not require GST/HST to be charged however no corresponding ITCs can be claimed on related expenses.
Self-assessment errors on acquisition of real estate (two scenarios to be mindful of)
a. If the real estate acquisition is primarily used for taxable activities (e.g. commercial) – full ITCs can be claimed and the amount of HST owing would be nil. If a self-assessment is not completed, the CRA can reassess and add the HST due on the HST return. Thus, not having the ability to amend a return to add additional ITCs can result in significant cash flow issues and interest assessed by the CRA.
b. If the real estate acquisition is used for exempt activities (e.g. long-term residential) then no ITCs can be claimed and HST would be owed. In this scenario, if a self-assessment is not completed, the CRA can also reassess and include interest (same as scenario a).
Claiming 100% ITCs on meals/entertainment and passenger vehicles
• Meals/entertainment claims are only eligible at 50% of the ITCs.
• Passenger vehicle ITCs are capped at the GST/HST on $37,000 capital cost.
Failure to charge/collect GST/HST on the sale of assets
• Commodity tax registrants are required to charge GST/HST when selling an asset used for commercial purposes.