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UNCLAIMED GST ITCs ALLOWED ON REASSESSMENT

TCC CONFIRMS CRA MUST ACCOUNT FOR UNCLAIMED CARRIED-FORWARD ITCs

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In a long-running GST/HST issue, the question has been whether the Minister’s obligation to “audit to net tax” requires CRA to take into account ALL unclaimed Input Tax Credits (“ITCs”) carried forward to a particular reporting period under audit. In the past, CRA maintained that its obligation under section 296(2) of the Excise Tax Act (“ETA”) only required it to allow unclaimed ITCs for the particular reporting period under audit and not any that may have then remained unclaimed from prior periods.

In a seismic decision of Justice Visser of the Tax Court of Canada ("TCC"), the TCC has now answered that question in favour of all Canadian GST registrants — a decision which we review below.

Ontario Tire Stewardship Decision

In Ontario Tire Stewardship v. The King, 2026 TCC 77, the Appellant (“OTS”) filed a protective claim for ITCs carried forward to its December 2013 GST/HST reporting period (the “Original Claim”). The CRA initially denied the claim, but agreed to hold OTS’s objection in abeyance pending the outcome of Stewardship Ontario v. The Queen, 2018 TCC 59, which addressed whether an industry funding organization such as OTS was carrying on commercial activities and therefore entitled to claim ITCs.

Following that decision, which answered the question in the affirmative, the CRA agreed that the Original Claim could be allowed, subject to a verification audit. During the audit process, OTS discovered approximately $1 million in additional ITCs arising in 2012 reporting periods that had been omitted from the Original Claim (“Unclaimed ITCs”). While the CRA allowed the Original Claim on reassessment, it denied the Unclaimed ITCs on the basis that subsection 296(2) of the ETA did not apply to unclaimed ITCs carried forward from prior reporting periods. OTS appealed.

At the TCC, the dispute turned on the wording of paragraph 296(2)(a), which generally requires the Minister, when assessing a person’s “net tax”, to account for amounts that “would have been allowed as an input tax credit for the particular reporting period” had they been claimed in a return for the particular reporting period.

The Minister argued that the lack of a reference to “preceding reporting periods” limits subsection 296(2) to ITCs arising in the reporting period under assessment, and since the Unclaimed ITCs originated in earlier reporting periods, the provision ought not apply.

The TCC disagreed. After concluding that the issue remained an open question, the Court undertook a textual, contextual and purposive analysis of subsection 296(2).

From a textual perspective, the TCC held that it would be inconsistent with the principles of statutory interpretation to treat subsection 296(2) as narrowing the concept of “net tax” established in section 225, which expressly provides that “net tax” for a particular reporting period includes ITCs carried forward from prior reporting periods.

The contextual and purposive interpretations pointed to the same conclusion because: (1) the definition of “net tax” in section 225 forms part of the relevant statutory context, and (2) the purpose of subsection 296(2) was to prevent the CRA from ignoring ITCs that a registrant was entitled to claim, provided that the statutory requirements are otherwise met (as was the case for the Unclaimed ITCs). Accordingly, OTS was entitled to the Unclaimed ITCs.

Takeaways

Ontario Tire Stewardship is a seismic GST/HST decision confirming that when “auditing to net tax” the CRA must take into account ALL unclaimed allowable ITCs up and to the particular period under review / reassessment. This is a significant victory for taxpayers facing GST/HST reassessment, and effectively stops CRA from unjustly enriching itself through unclaimed ITCs!

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