For most small-business owners it's probably safe to say that collecting taxes on behalf of the government can be a nuisance.
"These are in the category that are called 'trust monies,'" said Dale Barrett, of Toronto-based Barrett Tax Law, "and the Canada Revenue Agency goes crazy over trust monies."
What's more, the legislation related to the harmonized sales tax and the goods and services tax is complex, and it's easy to make costly mistakes. Here are the seven most common HST/GST errors.
Not registering with the CRA
For Kristin Li, owner of Tax911Now.com, the top HST/GST error she sees is small-business owners not registering. "They have no clue that once they pass $30,000 in billings, they have to register for GST or HST," she said. One of her clients, she recalls, had already made $70,000 and hadn't thought to register.
Companies that hit the $30,000 mark within the previous four quarters have until the end of the month following the crossing of that threshhold to register and start collecting tax.
"But if you hit it within one quarter alone then you have to register at the time your invoice puts you over $30,000," said Paul McVean, tax partner at Anklesaria McVean Professional Corp. in Toronto, and start collecting immediately on that invoice.
New business owners in particular make this mistake, he says. And whether they charged their customers or not, they still have to pay CRA what they should have collected.
Not paying on time
Sometimes a small business owner with cash-flow problems will hold onto the tax money, Mr. Barrett said. "A lot of people will say, 'Well, I will just meet the payroll with the HST money I have now, and when business gets better we will pay back the government.'"
That can get them into a lot of trouble with the CRA, he added. "You can get yourself into a position where they can become very aggressive with the collection."
Not getting a new account when incorporating
Companies often assume they can keep using the same HST number and account when they incorporate, said Mr. McVean. "Of course that number is really attached to them as a sole proprietor."
Ms. Li said this often happens to contractors and other small business people. "Usually they start small and later become big and have to incorporate. They often forget that they can't use the old GST number any more."
If a small-business owner has already gone through the incorporation process but neglected to update their records with CRA, it can lead to a paperwork nightmare.
Charging when they don't have an account
Some businesses do the reverse, collecting HST before they have registered, Mr. McVean said. "The problem with that is, if the people who are then paying the HST go through an audit, and the auditor matches up HST numbers, they could determine that there was no registrant with an HST number at that time period."
By collecting tax money before it has registered, the business has not only created a problem for its clients but broken the law as well.
Messing up when doing business in another province
Adding to the HST/GST confusion, provinces charge varying amounts of tax. "Businesses selling products or services in other provinces need to charge the sales taxes applicable to the place of consumption," Ms. Li explained. So if an Ontario-based business is selling a product or service in Alberta, for example, only the 5-per-cent federal portion can be charged.
On goods, moreover, "it can get a little bit trickier," said Mr. McVean, "because it depends on where the customer is considered to have actually acquired that purchase, and that has to do with whether it is shipped freight-on-board or not."
Business owners can check rates for all the provinces and territories on the CRA website.
Not paying HST/GST on their employees' taxable benefits
"We see that missed all the time," said Mr. McVean. He admitted, however, that this can be complicated "because you're not actually paying or collecting any HST as part of those transactions and have to calculate a kind of notional amount.
"Essentially you have to figure out what would have been the HST had you paid a third party, and then alter your HST return accordingly," he said.
Not documenting input-tax credits properly
Businesses pay taxes on their own purchases and can deduct them as expenses. "That," said Mr. McVean, "is where they don't get it right a lot of the time."
When claiming the input-tax credit, or ITC, he said, business owners might have the receipts but not the breakdown showing the HST or GST component. "Particularly with things like restaurant meals," he said, "we just see a total. So record keeping is a problem, in terms of keeping the receipts that show the breakdown of HST paid and the HST number of the vendor."
What's more, company owners need to remember that only the business portion of such expenses can be claimed. "The rules around claiming ITCs mirror the income-tax deductibility rules," he said, "so if it is not deductible for income tax, chances are you can't claim the ITC either."