A recent Tax Court of Canada decision could significantly affect organizations undergoing GST/HST audits. In Ontario Tire Stewardship v. The King (2026 TCC 77), the court concluded that, when assessing a taxpayer’s net tax, the Canada Revenue Agency (CRA) must take into account eligible unclaimed Input Tax Credits (ITCs) from prior reporting periods—even where those ITCs would otherwise have been outside the normal four-year claim period.
For businesses under audit, the decision may create new opportunities to reduce assessments by identifying and recovering ITCs that were previously assumed unavailable.
Understanding the Four-year ITC Window
One of the fundamental principles of a value-added tax system such as GST/HST is that tax should ultimately be borne by the final consumer, not by businesses participating in the supply chain. Businesses recover the GST/HST they pay on eligible purchases through ITCs, preventing tax from becoming an embedded business cost.
Under the Excise Tax Act (ETA), most registrants generally have four years to claim eligible ITCs. This allows businesses to recover GST/HST that may not have been claimed immediately because of documentation delays, disputes with suppliers, or other timing issues.
The challenge arises when a GST/HST audit uncovers a matter of non-compliance while the taxpayer simultaneously discovers previously unclaimed ITCs from earlier periods. Historically, it has not always been clear whether those older credits could still be used to offset the assessment.
The Question Before the Court
The issue centered on subsection 296(2) of the ETA, which addresses the calculation of net tax when the CRA makes an assessment. This provision requires the CRA, when reassessing a reporting period, to consider certain allowable ITCs and deductions that were not originally claimed. The uncertainty was whether this obligation applied only to ITCs arising in the reporting period under audit or whether it also extended to eligible ITCs carried forward from earlier reporting periods.
For many years, the CRA generally interpreted subsection 296(2) narrowly, taking the position that only ITCs arising in the reporting period under audit were required to be considered. Tax professionals, however, argued that the legislation should permit recovery of eligible ITCs from prior reporting periods because those credits form part of the taxpayer’s overall net tax calculation.
The Court’s Decision
In Ontario Tire Stewardship v. The King, the Tax Court adopted the broader interpretation. Justice Visser concluded that the ETA’s definition of “net tax” intentionally allows ITCs from preceding reporting periods to be carried forward and claimed. As a result, subsection 296(2) should not be interpreted as narrowing that broader statutory framework simply because it does not expressly reference prior reporting periods.
The court also emphasized the broader purpose of the GST/HST system: preventing unrecoverable tax from becoming embedded in business costs. Interpreting subsection 296(2) to exclude otherwise valid carried-forward ITCs would undermine that objective and create inconsistent results.
The decision provides important clarification regarding how credits from a prior reporting period should be taken into account by CRA in assessing net tax.
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What This Means for Taxpayers
This decision provides important clarification regarding the conflicting interpretations of how net tax is calculated under subsections 296(2) and (2.1). In doing so, it may open a historical window of up to four years prior to the period being assessed to recover taxes that were paid but not previously recovered.
For example, if the CRA is auditing a July 2023 reporting period, the taxpayer may also have an opportunity to identify eligible ITCs from reporting periods dating back as far as July 2019 that remained unclaimed but would have been available to carry forward into the period under review.
Where the statutory requirements are otherwise satisfied, those ITCs may now be available to reduce the reassessed net tax, along with any associated interest and penalties. As a result, organizations under audit should consider whether previously overlooked ITCs exist in earlier reporting periods before accepting a proposed assessment.
How DMA Can Help
This decision may create meaningful recovery opportunities for organizations currently involved in GST/HST audits or reassessments. DMA’s Canada sales tax professionals work with organizations throughout the audit process to identify unclaimed ITCs, evaluate recovery opportunities, and support discussions with the CRA. In light of the Ontario Tire Stewardship decision, businesses may wish to revisit periods that were previously assumed to be closed in order to determine whether additional recoveries may now be available.
This website content should be used for general informational purposes only, and not as a substitute for consultation with professional tax, legal, or other competent advisors.
Before making any decision or taking any action based upon information contained on this website, you should consult with a DMA professional.