Most entrepreneurs eventually reach a point where they need to start charging the goods and services tax (GST) or the harmonized sales tax (HST). But which one? And when should they begin?
Here are a few basics on collecting money for the government.
Where does your customer live?
Which tax to charge, GST or HST, depends on the province in which the customer is based.
Some new companies begin charging these taxes immediately if they plan to grow quickly, while others wait until it’s required, which is when the business generates $30,000 of sales over the last four consecutive quarters.
The decision on when to charge GST or HST might also depend on who the customer is and whether that client can claim a refund of the tax, says Debbi-Jo Matias, a Vancouver-based chartered professional accountant.
For instance, Ms. Matias says, a hairdresser may not charge clients the GST/HST until it has to, because individual customers likely can’t claim the tax. However, a consultant might charge a corporate client the GST immediately, since it can be treated as a refundable input tax credit (ITC) for the corporation.
Businesses can also appear more professional if they have enough sales to require adding the GST or HST, says Ms. Matias.
Also, owners can’t always retroactively register for GST/HST on past expenses, which is another reason it might be best to start charging it immediately. “It’s probably the safest and easiest way to do it,” she says.
Once business owners have registered for GST/HST, they must continue to charge it, even if their sales fall below the $30,000 mark in subsequent years.
Setting up the tax
Entrepreneurs can register for GST/HST online through the Canada Revenue Agency’s (CRA) business registration system, through the mail using Form RC1, or by calling 1-800-959-5525. Once registered, the owner will receive an individual GST/HST number to be included on all invoices.
The CRA will then automatically provide a year-end filing date of Dec. 31, but that can be changed if your business has a different year-end, Ms. Matias says. This will simplify bookkeeping for both GST/HST and income tax returns.
Business owners also can choose whether to file their GST/HST returns quarterly or annually. (Companies that generate more than $1.5-million in annual sales are required to file quarterly.)
While quarterly filing requires more reporting to the CRA, some business owners may prefer it to keep on top of things. Ms. Matias notes that owners who file their GST/HST annually will still be required to make quarterly payments. “The CRA will wait for your return, but they don’t want to wait for your money,” she says.
Some companies pay more GST/HST than corporate taxes if they have high sales, but they might not have much net income. As a result, they may have cash-flow issues when the time comes to remit GST/HST quarterly. “I always tell people, at least until they get the hang of things, to put the GST/HST money they’ve collected on sales aside … and be prepared to pay it,” Ms. Matias says.
A business owner who owes more than $3,000 in GST/HST may be required to make quarterly GST/HST payments in the following year. If they don’t make the payments, instalment interest will be charged.
Companies that file late will face a penalty based on a percentage of GST/HST owed, as well as a penalty for inaccurate reporting.
Gabrielle Loren, partner for business development at the B.C.-based accounting firm Loren Nancke, Chartered Professional Accountants, reminds business owners that they are collecting GST/HST on behalf of the CRA.
“These are trust funds,” Ms. Loren says. “If you do not pay them on time and in full, CRA has the right to go to any means to collect.” Business owners are personally liable to CRA for any GST/HST debt even if they operate the business through a corporation or the corporation closes.
The ‘quick method’
In addition to funnelling taxes paid by customers to the government, business owners also pay tax on products and services they purchase to run their businesses. These amounts can be reimbursed. Owners can tally up the taxes paid, or they can qualify to use the so-called “quick method." This means using a percentage of total revenue to calculate the amount, rather than tallying GST collected minus ITCs.
It’s an option for businesses for which sales plus GST/HST income amounts to less than $400,000 in the last four quarters, regardless of whether the business is incorporated. The quick method is often best for businesses with relatively few expenses that don’t want to go through the trouble of calculating their GST/HST on every item.
“The quick method is best for what I call the numerically challenged,” says Ms. Loren. Depending on your level of business expenses, the quick method can save you GST/HST payable and can even make you money, although that money is taxable.
To qualify for the quick method, the business has to be GST/HST-registered for at least a year. Ms. Loren advises owners to be aware of their income level and total expenditures subject to GST/HST, to ensure they’re using the most beneficial method.
- Many business owners don’t realize, at least at first, that they must charge GST or HST based on the province where the customer is located. For instance, for a client in B.C. or Alberta a business owner would charge 5 per cent GST, while a client in Ontario would be charged 13 per cent HST. “Make sure if you’re selling out of province that you’re charging the right rate,” says Ms. Loren.
- If you’re selling outside Canada, you don’t have to charge GST/HST.
- Owners should add the GST/HST number to their invoices. “If your clients are audited, the CRA will need to know if they were charged the tax appropriately,” Ms. Loren says.
- Business owners might not realize that they have four years to claim the GST/HST paid on expenses. “Often people who are just starting their businesses don’t realize they can write off certain items in their business they’ve paid for with their personal money,” Ms. Loren says.
- Owners should keep receipts for their expenses with the GST/HST information broken out. They might think their credit-card bill with the total is enough, but it’s not, says Mr. Loren.
- Business owners who aren’t sure of their GST/HST responsibilities should call their accountant or the CRA. “The CRA is pretty good at giving you all of the information, you just need to make the inquiries,” says Ms. Loren. “It doesn’t cause an audit. They just want to help you. They really do.”